AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-15477
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GENERAL BEARING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3562
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
13-2796245
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
---------------
44 HIGH STREET
WEST NYACK, NEW YORK 10994
(914) 358-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID L. GUSSACK
PRESIDENT
GENERAL BEARING CORPORATION
44 HIGH STREET
WEST NYACK, NEW YORK 10994
(914) 358-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
STEVEN L. WASSERMAN, ESQ. JAMES M. JENKINS, ESQ.
REID & PRIEST LLP HARTER, SECREST & EMERY
40 WEST 57TH STREET 700 MIDTOWN TOWER
NEW YORK, NEW YORK 10019 ROCHESTER, NEW YORK 14604
(212) 603-2000 (716) 232-6500
---------------
APPROXIMATE DATE COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered(2) Per Share(2) Offering Price(2) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share........................... 1,035,000 $9.00 $9,315,000 $2,823
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value,
issuable upon exercise of
Representative's Warrant ....... 90,000(4) $12.60 $1,134,000 $344
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Total .................. 1,125,000 $10,449,000 $3,167
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</TABLE>
(1) Includes 135,000 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any, and 90,000 shares
underlying the Representative's Warrant. See "Underwriting."
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(3) The Registrant previously filed a registration fee of $4,222.
(4) Pursuant to Rule 416(a) under the Securities Act of 1933, there also are
being registered such additional securities as may be issued pursuant to the
antidilution provisions of the Representative's Warrant.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 6, 1997
PROSPECTUS
- ----------
900,000 SHARES
[LOGO]
GENERAL BEARING CORPORATION
COMMON STOCK
All of the shares of common stock, $.01 par value per share ("Common
Stock"), offered hereby are being sold by General Bearing Corporation, a
Delaware corporation ("Company"). Prior to this offering ("Offering"), there has
been no public market for the Common Stock, and there can be no assurance that
an active market will develop. It is currently estimated that the initial public
offering price will be between $7.00 and $9.00 per share. The offering price of
the Common Stock will be determined by negotiation between the Company and H.J.
Meyers & Co., Inc., the representative ("Representative") of the several
underwriters ("Underwriters"), and is not necessarily related to the Company's
asset value or any other established criterion of value. For the method of
determining the initial public offering price of the Common Stock see "Risk
Factors" and "Underwriting." The Common Stock has been approved for listing on
the NASDAQ SmallCap Market under the symbol "GNRL."
---------------
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. PERSONS WHO PURCHASE THESE SECURITIES WILL INCUR SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
================================================================================
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a non-accountable expense allowance of
$________ (or $_________ if the Underwriters' over-allotment option
described in footnote (3) is exercised in full); and (ii) warrants to
purchase up to 90,000 shares of Common Stock at $ per share (that being
140% of the initial public offering price), exercisable over a period of
four years, commencing one year from the date of this Prospectus
("Representative's Warrants"). In addition, the Company has agreed to
indemnify the Underwriters against certain civil liabilities under the
Securities Act of 1933, as amended ("Act"). See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company,
estimated at $633,500, including the Representative's non-accountable
expense allowance.
(3) The Company has granted the Underwriters an option, exercisable within 45
business days of the date of this Prospectus, to purchase up to 135,000
additional shares of Common Stock on the same terms and conditions as set
forth above to cover over-allotments, if any. If all such additional shares
of Common Stock are purchased, the total price to public, underwriting
discounts and commissions and proceeds to Company will be increased to
$________, $_________ and $ _________, respectively. See "Underwriting."
The shares of Common Stock are offered on a "firm commitment" basis by
the Underwriters when, as and if delivered to and accepted by the Underwriters,
and subject to prior sale, withdrawal or cancellation of the offer without
notice. It is expected that delivery of the certificates representing the shares
of Common Stock will be made at the offices of H.J. Meyers & Co., Inc., 1895 Mt.
Hope Avenue, Rochester, New York 14620 on or about February , 1997.
[Logo]
THE DATE OF THIS PROSPECTUS IS _________ , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[Logo]
[Insert 4/color Photo]
STANDARD AND SPECIAL BALL AND ROLLER BEARINGS
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF COMMON STOCK OF THE
COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The General(R) is a trademark of, and Hyatt(R) is a trademark licensed to, the
Company. This Prospectus also includes names, tradenames and trademarks of other
companies.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Investors
should consider carefully the information set forth under "Risk Factors." Unless
otherwise indicated, (i) the information set forth in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and (ii) all share and per
share data gives effect to a 3,000-for-one stock split effective as of October
10, 1996. Certain of the information contained in this Prospectus Summary and
elsewhere in this Prospectus, including information with regard to the Company's
strategy for expanding operations and market share and related financing
requirements, are forward looking statements. For a discussion of important
factors that could affect such matters, see "Risk Factors." All references to
the Company's operations for a particular fiscal year refer to the 52-53 week
period ended on the last Saturday in December of such year. The 39 week periods
ended September 30, 1995 and September 28, 1996 are referred to herein as the
"1995 Interim Period" and the "1996 Interim Period," respectively.
THE COMPANY
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 Bearings, Inc., 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 locomotives 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.
* 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
3
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, the U.S. Department of Commerce ("Commerce") has granted a
preliminary order with respect to SGBC revoking the applicability to it of
an antidumping order covering tapered roller bearings ("TRBs") issued in
1987. A final determination revoking the antidumping order as it applies
to SGBC would result in a direct benefit to the Company and SGBC by
eliminating costs associated with antidumping duties, yearly antidumping
investigations and other compliance requirements related thereto. There
cannot be any assurance that Commerce will determine to revoke the
antidumping order as it applies to SGBC. However, in each of the four
annual reviews of the antidumping order in which SGBC was a respondent and
Commerce issued a final order, Commerce imposed no antidumping margin on
SGBC. The Company knows of no such revocations pending for other companies
and believes its own revocation, if granted, will provide 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 1995.
* 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
$42.1 million in fiscal 1995, and reported operating income of $354,000
for fiscal 1995 compared to an operating loss of $387,000 for fiscal 1993.
Primarily as a result of a charge due to customer damage claims connected
with a product recall of certain tapered journal bearings, the Company
incurred a loss of approximately $1.7 million for fiscal 1995. However,
during the 1996 Interim Period, the Company recorded operating income of
approximately $2.4 million. During the bankruptcy, the Company lost its
status as an approved vendor to certain distributors of bearings and
bearing products. 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 this Offering it may be redesignated as an approved
vendor by certain of such distributors, enabling the Company to increase
its distribution sales, and this 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.
The Company was incorporated in 1958 by Seymour I. Gussack, its current
Chairman of the Board of Directors. The Company's principal executive offices
are located at 44 High Street, West Nyack, New York 10994, and its telephone
number is (914) 358-6000.
4
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales .................................... $ 27,254 $ 37,032 $ 42,070 $ 31,963 $ 29,800
Gross profit ............................. 6,529 8,548 10,001 7,817 7,861
Provision (recovery) -- customer damage
claims ................................. -- -- 2,152(2) 2,152(2) (101)
Operating income (loss) .................. (387) 874 354 117 2,394
Income (loss) before income tax (benefit)
and extraordinary item ................. (365) 255 (2,229) (1,983) 1,425
Income tax (benefit) ..................... -- -- (500) -- 500
Income (loss) before extraordinary income (365) 255 (1,729) (1,983) 925
Extraordinary item ....................... 4,384(1) 108 -- -- --
Net income (loss) ........................ $ 4,019 $ 363 $ (1,729) $ (1,983) $ 925
Net income (loss) per common share (before
extraordinary item) .................... $ (.02) $ .08 $ (.58) $ (.66) $ .31
Net income (loss) per share .............. $ .17 $ .12 $ (.58) $ (.66) $ .31
Shares used in calculating net income (loss)
per share(3) 23,125,000 3,000,000 3,000,000 3,000,000 3,000,000
</TABLE>
SEPTEMBER 28, 1996
------------------------
ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital ............................. $ 3,740 $ 9,041
Total assets ................................ 24,399 27,199
Current liabilities ......................... 16,866 14,566
Long-term debt (less current maturities) .... 4,668 4,668
Stockholders' equity ........................ 2,865 7,965
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(1) In December 1993, the Company emerged from a bankruptcy reorganization
which commenced in September 1991. In connection with its Plan of
Reorganization, the Company issued to World Machinery Company ("World"),
which prior to this Offering owned all of the Common Stock: (i) a 6%
Secured Promissory Note due 1998 in the original principal amount of $2.5
million ("Secured Note"), (ii) a non-interest bearing, Unsecured Promissory
Note in the principal amount of $750,142 payable in annual installments of
$125,000 commencing December 1993 ("Installment Note") and (iii) 1,000
5
shares of Common Stock (3,000,000 shares after giving effect to the
3000-for-one stock split effective October 10, 1996). The Secured Note,
Installment Note and 1,000 shares of Common Stock were issued in exchange
for a note in the original principal amount of $12.0 million, together with
accrued interest thereon in the amount of $2,701,416 ("Discharged
Obligation"). World acquired the Discharged Obligation from Wells Fargo
Bank N.A. ("Wells Fargo"), which provided financing for the Company's
purchase of Hyatt in March 1987 and for working capital. The difference
between the amount of the Discharged Obligation and the principal amounts
of the notes and the value attributed to the Common Stock issued to World
in exchange for the Discharged Obligation, $11,451,274, has been recorded
as a contribution to capital. In addition, unsecured creditors of the
Company were offered a cash settlement equal to 5% of their outstanding
pre-petition claims or, in the alternative, 10% of such claims, payable 2%
per year for five years, which resulted in an additional reduction in
obligations of $3,974,380. See "Risk Factors -- Bankruptcy Reorganization,"
"Company History," "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Notes to Consolidated Financial
Statements.
(2) In April 1995, three railroads reported to the AAR problems with a total of
eight bearings which had overheated due to friction that was attributed to
misplaced seals on the Company's tapered journal bearings. The Company
agreed with the AAR to recall and replace all Company tapered journal
bearings that had been shipped. In anticipation of the expenses related to
the reimbursement, recall and rework, the Company accrued a one-time charge
of approximately $2.2 million in fiscal 1995. See "Risk Factors -- Product
Recall."
(3) For an explanation of the number of shares used to calculate net income
(loss) per share, see "Consolidated Financial Statements -- Summary of
Significant Accounting Policies."
(4) Adjusted to reflect the application of the estimated net proceeds of this
Offering, after deducting underwriting discounts and commissions and
estimated Offering expenses. Pending the application of the net proceeds,
the Company intends to use such proceeds to repay outstanding borrowings
with the proceeds of this Offering. The Revolving Credit Facility currently
terminates in June 1998 and will remain available through that date, with
or without repayment of outstanding borrowings under the Revolving Credit
Facility. 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 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
(x) the aggregate amount of outstanding letters of credit and (y) such
reserves as the lender may reasonably deem proper and necessary from time.
See "Use of Proceeds," "Capitalization" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
THIS OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by
the Company................................. 900,000 shares
Common Stock to be Outstanding after this
Offering(1)................................. 3,900,000 shares
Use of Proceeds............................... Expansion of manufacturing capacity, marketing and research
and development; working capital
NASDAQ SmallCap Market Symbol ................ "GNRL"
</TABLE>
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(1) Excludes: (i) 500,000 shares reserved for issuance pursuant to the Company's
1996 Stock Option and Performance Award Plan ("1996 Option Plan"), of which
options to purchase 257,500 shares of Common Stock at the price offered to
the public in this Offering have been granted subject to certain vesting
periods; and (ii) 90,000 shares of Common Stock issuable upon exercise of
the Representative's Warrants.
6
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk and should not be made by persons who cannot afford the loss of their
entire investment. Prospective investors, prior to making an investment
decision, should consider carefully, in addition to the other information
contained in this Prospectus (including the financial statements and notes
thereto), the following factors. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this
Prospectus.
BANKRUPTCY REORGANIZATION
In 1987, the Company purchased the assets of Hyatt, a manufacturer of TRBs
for automotive OEM and railway markets and cylindrical roller bearings for
locomotive applications. In order to finance the purchase and related working
capital requirements, the Company borrowed $12.0 million from Wells Fargo. As a
result of a number of factors, including litigation between local residents and
the Town of Orangetown, New York challenging the establishment of a Company
production facility, the Company was delayed in reestablishing the production of
Hyatt products. During the litigation, the Company continued to maintain the
Hyatt assets and related executive, maintenance and production staff at the
facility in New Jersey at which they had been located. However, the Company
could not operate the facilities without potentially incurring liability as an
operator under applicable environmental laws. The expenses incurred to maintain
the assets and staff before production commenced at another location materially
and adversely affected the Company's financial position. In addition, the delays
adversely affected the Company's efforts to regain Hyatt's market share for
journal boxes (locomotive axle bearings), traction motor bearings (part of the
drive motor of a locomotive) and TRBs. Sales of journal boxes and traction motor
bearings by the Company were limited to $776,000 in 1987 and approximately $2.0
million in 1988, compared to sales by Hyatt of approximately $11.0 million in
1986. In addition, Hyatt sales of TRBs aggregated approximately $70.3 million in
1985 and the Company did not have any sales of such Hyatt products for 1987 or
1988. As a result of a lack of sales, the Company became unable to meet its
obligations under its loan agreement with Wells Fargo, and filed for protection
under Chapter 11 of the U.S. Bankruptcy Code in September 1991. In connection
with its reorganization in bankruptcy, the Company took significant steps to
improve its operations and financial position, leading to profitability in 1994.
The Company's long-term viability, however, will depend upon its ability to
sustain profitable results of operations. There can be no assurance that such
results can or will be sustained. See "Company History."
PRODUCT RECALL
In January 1995, the Company initiated shipments of Hyatt tapered journal
bearings (a type of TRB), which are used in the manufacture and maintenance of
railroad freight cars. Through April 1995, the Company shipped approximately
10,000 tapered journal bearings to five railroad car manufacturing customers:
Trinity, National Steel Car Company, Thrall Car Manufacturing, TTX Company and
American Allied Railway Equipment Company. During April 1995, three railroads,
CSX, Burlington Northern and Southern Pacific, reported to the AAR problems with
a total of eight bearings, which had overheated due to friction that was
attributed to misplaced seals. The AAR and the Company investigated the reports
and the AAR issued a warning notice to all railroads. The Company agreed with
the AAR to recall and replace all Company bearings which had been shipped.
Claims were submitted to the Company by railroad car manufacturers and railroads
for replacement bearings and damages, including incidental damages, related to
the recall. In anticipation of the expenses related to the reimbursement, recall
and rework, the Company accrued a one-time charge of approximately $2.2 million
in fiscal 1995, which resulted in the Company incurring a net loss of
approximately $1.7 million for fiscal 1995. As of September 28, 1996, the
Company had resolved more than 95% of the claims to the customers' satisfaction.
The Company satisfied approximately 83% of the claims by shipping new tapered
journal bearings. The Company's liability insurance carrier agreed to reimburse
the Company
7
approximately $450,000 for certain claims attributable to incidental damages, of
which approximately $442,000 has been received by the Company through November
1996. After completing its investigation, in September 1995, the AAR approved
the Company's tapered journal bearings for use in railroad freight cars,
conditioned upon the Company providing information to the AAR about the number
of bearings returned from service, submitting a written proposal for further
handling of roller bearing components that were returned and making arrangements
for an AAR representative to witness the teardown of a sample of the recalled
roller bearings. The Company satisfied these conditions and, in addition to
shipping bearings to replace those removed from railroad freight cars, has
received orders for new tapered journal bearings from various customers. The
Company has not received any additional claims relating to the recall since
August 1996 and believes that no additional claims will be made. The Company
further believes that its Quality Assurance system (See "Business -- Quality and
Customer Service Programs") has reduced the possibility of future recalls.
However, any additional recalls could have a material adverse effect on the
Company's reputation, business, results of operations and financial condition.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business."
MANAGEMENT'S BROAD DISCRETION IN USE OF PROCEEDS; UNSPECIFIED ACQUISITIONS
Approximately $2.1 million (41.2%) of the estimated $5.1 million of net
proceeds from this Offering (along with any net proceeds derived from the
exercise of the Underwriters' over-allotment option) will be used by the Company
for working capital and applied to general corporate purposes, including the
possible acquisition of the business or assets of other bearing manufacturers.
In the event the proceeds from this Offering are used to acquire such business
or assets, the stockholders purchasing in this Offering may not have the
opportunity to review the financial statements of such businesses or to vote on
such acquisitions. Accordingly, the Company's management will have broad
discretion as to the application of such proceeds. See "Use of Proceeds."
LOSS OF CERTIFICATIONS AND QUALIFICATIONS
In order to supply certain OEMs, particularly automotive manufacturers and
manufacturers of railroad freight cars and locomotives, the Company is required
to qualify with such customers and may have to obtain certifications and
registrations from the ISO, as well as other certifying organizations. There can
be no assurance that the Company will be successful in maintaining its
certifications or qualifications in the future. From time to time, the Company
also may be subject to requirements by customers to obtain certifications and
qualifications which it does not currently possess. For example, GM has
requested that by December 1997 the Company meet the QS 9000 standard, a
standard jointly developed by GM, Ford Motor Company ("Ford") and Chrysler
Corporation ("Chrysler") that has all the basic systems of ISO 9001 with
additional requirements specific to the automotive industry. 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. However, the
Company is unable to anticipate or predict changes in the requirements to
maintain existing certifications or qualifications, and there can be no
assurance that the Company will be successful in obtaining any new
certifications or qualifications. A failure to meet existing or additional
certifications or qualifications requirements may have a material adverse effect
on the business and results of operations of the Company. See "Business --
Quality and Customer Service Programs."
OPERATING RESULTS; ACCUMULATED DEFICIT
The Company's industry is characterized by relatively narrow profit margins
and the Company's earnings depend significantly on its ability to manufacture
and distribute products efficiently and to source products and components on
favorable terms. Operating results between 1987 and 1991 were adversely affected
by the Company's inability to service debt incurred in connection with its
acquisition of Hyatt, resulting in the Company's filing in 1991 for protection
under the federal bankruptcy laws. As of September 28, 1996, the Company had an
accumulated deficit of approximately $20,819,000. The Company's performance has
been, and future performance will be, subject to a number of factors,
8
including those beyond its control. Such factors include, but are not limited
to, economic downturns, increased competition and price increases of components,
raw materials and finished products that the Company distributes. During periods
of economic expansion, when industrial production is increasing, the demand for
bearings normally increases. Likewise, during recessionary times, the bearing
industry is affected adversely by declines in demand and possible increases in
delinquent accounts receivable. In addition, operating results may be adversely
affected by losses incurred at Company joint ventures, for which the Company
accounts using the equity method. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Consolidated Financial
Statements -- Summary of Significant Accounting Policies."
SUBSTANTIAL INDEBTEDNESS
The Company has incurred substantial indebtedness to finance its needs for
working capital in the form of a $15.0 million revolving credit facility
("Revolving Credit Facility") from the Bank of New York Commercial Corporation
("BNYCC"). At January 24, 1997, the Company had indebtedness under the
Revolving Credit Facility of approximately $9,623,000, representing
approximately 337% of stockholders' equity as of September 28, 1996. The
Company's high level of indebtedness has the following important consequences:
(i) significant interest expense resulting in substantial annual fixed charges;
(ii) significant limitations on the Company's ability to obtain financing, fund
working capital requirements, make capital expenditures and acquisitions and
take advantage of other significant business opportunities that may arise; and
(iii) increased vulnerability to adverse general economic and industry
conditions. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
RELIANCE ON BORROWINGS UNDER REVOLVING CREDIT FACILITY
Borrowings under the Revolving Credit Facility are secured by the Company's
accounts receivable, inventory and various other assets, based on certain
coverage ratios. The Revolving Credit Facility contains covenants which, among
other things, limit the Company's ability to incur additional indebtedness and
require the Company to maintain certain levels of working capital and satisfy
other financial tests. The Company has obtained several amendments to the
Revolving Credit Facility to increase the maximum amount permitted to be
borrowed and to increase the percentage of receivables or inventory used to
determine the amount available to be borrowed at any time. Since the beginning
of fiscal 1994, BNYCC has agreed on two occasions to increase the amount
available to be borrowed from the amount otherwise permitted by the applicable
percentages of receivables and inventory ("Overadvances"). In each case, the
increase in availability was based, in part, upon the agreement of David L.
Gussack, the Company's President, to personally guarantee payment of the
Overadvances. In addition, BNYCC may require the establishment of such reserves
as it may reasonably deem proper and necessary from time to time, thus reducing
the amounts that may otherwise be borrowed under the Revolving Credit Facility.
There can be no assurances that BNYCC will agree to any future Overadvances,
that David L. Gussack will provide, if needed, additional personal guarantees or
that BNYCC will not require additional reserves. As a result of the effects of
the recall of tapered journal bearings, as of December 31, 1995, the Company was
not in compliance with covenants requiring the maintenance of minimum tangible
net worth and of fixed charge coverage rates. BNYCC agreed to waive such
noncompliance and amended such covenants. There can be no assurances, however,
that BNYCC will grant any such waivers or amendments in the future. As of
September 28, 1996, the Company was required to maintain a tangible net worth,
as defined, of $2,835,000, a fixed charge ratio of 1.3 to 1.0 and a ratio of
current assets to current liabilities of .90 to 1.0. The Company's actual
results as of September 28, 1996 reflected a tangible net worth of $4,511,000, a
fixed charge ratio of 1.85 to 1.0 and a ratio of current assets to current
liabilities of 1.22 to 1.0. As of September 28, 1996, the Company was in
compliance with all other covenants under the Revolving Credit Facility and all
Overadvances due had been repaid. The Revolving Credit Facility expires in June
1998. Based upon the Company's performance and 20 year relationship with BNYCC,
the Company intends to request and believes it may be able to obtain more
favorable terms on the Revolving Credit Facility upon the completion of this
Offering, although there can be no assurance that it will be able to do so. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
9
COMPETITION
The ball and roller bearing industry is highly competitive. The Company believes
that competition in the industry is based principally on engineering,
experience, quality, price and the ability to meet customer delivery
requirements. Price competition in the industry affects the Company's ability to
increase prices on certain products and, in some cases, subjects the Company to
pressure from its customers to reduce prices. While efforts to improve its
manufacturing and assembly processes have permitted the Company to reduce costs
through operating efficiencies, thereby improving profitability, there can be no
assurance that continued pricing pressure will not have a material adverse
effect on the Company's operations. The Company does not own any U.S. or foreign
patents or proprietary protection that is material to its business.
Additionally, many of the Company's competitors have greater financial resources
than the Company and there can be no assurance that the Company will continue to
be able to compete effectively with these larger manufacturers. The Company's
ability to compete with foreign based competitors also may be adversely affected
by an increase in the value of the U.S. dollar relative to foreign currencies.
See "Business -- Competition."
RELIANCE ON UNAFFILIATED MANUFACTURERS
The Company produces approximately 37% of the bearings that it sells and
obtains another 24% of components and finished products from joint ventures in
which it participates. The Company currently relies on approximately 82
unaffiliated manufacturers to produce the remaining 39% of the bearings that it
distributes. The Company maintains long term relationships with its unaffiliated
manufacturing sources, but does not have long term supply contracts with any of
them. In the event any of the Company's key unaffiliated manufacturers become
unable or unwilling to continue to manufacture the Company's products, the
Company would have to rely on other current manufacturing sources or identify
and qualify new unaffiliated manufacturers. In such event, there can be no
assurance that the Company would be able to qualify such manufacturers for
existing or new products in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet the Company's
requirements. Any significant delay in the Company's ability to obtain adequate
supplies of its products from its current or alternative sources could
materially and adversely affect the Company's business and results of
operations. See "Business -- Manufacturing and Sourcing."
RELIANCE ON QUALITY CONTROL OF UNAFFILIATED MANUFACTURERS
Although the Company believes that it maintains good control with respect to
product specifications and quality, there can be no assurance that unaffiliated
manufacturers will continue to produce products that are consistent with the
Company's quality and performance standards. In this regard, the Company has
occasionally received, and may in the future continue to receive, shipments of
product from unaffiliated manufacturers that fail to conform to the Company's
quality control standards. In such event, unless the Company is able to obtain
replacement products in a timely manner, the Company risks the loss of revenue
resulting from the sale of such products. Although, in the past, shipments from
unaffiliated manufacturers of products that failed to conform to the Company's
standards have not materially affected the Company's operations, there cannot be
any assurance that any failure in the future would not materially and adversely
affect the Company's results of operations and its reputation in the
marketplace. See "Business -- Sourcing and Manufacturing."
INTERNATIONAL OPERATIONS
The Company imports over half of its raw materials, components and finished
products from manufacturers, including joint ventures in which the Company
participates, located outside of the U.S., primarily in the PRC. As a result,
the Company's business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations, political unrest,
disruptions or delays in shipments and changes in economic conditions in
countries in which the Company's manufacturing sources, including both joint
ventures and unaffiliated manufacturers are located. These factors, among
others, could influence the Company's ability to manufacture its products or
procure certain materials. If any such factors were to render the conduct of
business in a particular country, including through joint ventures in which the
Company participates, undesirable or impractical, there could be a material
adverse effect on the Company's results of operations and financial condition.
The Company's inventory purchases from manufacturers in the PRC, including both
joint venture partners and unaffiliated manufacturers, generally are denominated
in U.S. dollars. Unanticipated changes in the value of the U.S. dollar relative
to the value of certain foreign currencies could have a material adverse effect
on the Company's
10
results of operations and financial condition. Additionally, the Company's
business is subject to the risks associated with the imposition of additional
U.S. legislation and regulations relating to the manufacture and importation of
foreign manufactured products, including duties, tariffs, taxes and other
charges or restrictions. The Company cannot predict whether additional U.S.
duties, tariffs, taxes or other charges or restrictions will be imposed upon the
importation of its products in the future, or what effect any such actions would
have on its business, financial condition and results of operations. A
significant portion of the Company's products is produced in the PRC. From time
to time, the U.S. government has considered imposing punitive tariffs on certain
exports from the PRC. Such sanctions, if implemented, could have a material
adverse effect on the Company's results of operations and financial condition.
See "Management's Discussion and Analysis of Results of Operation and Financial
Condition" and "Business -- Sourcing and Manufacturing."
LACK OF CONTROL OF JOINT VENTURES
The Company currently obtains approximately 24% of the bearings that it
sells from joint ventures in which it participates. Although the Company
believes that its participation in joint ventures improves its ability to
monitor and control production and quality, the Company does not exercise
complete control over any such joint venture and may be limited from exercising
such control by local law. The Company accounts for its investments in the joint
ventures using the equity method, which would result in it recognizing a portion
of any net losses incurred by a joint venture. Moreover, changes in foreign
government regulations, political unrest or other disruptions could threaten or
result in the forfeiture of the Company's investments in joint ventures or
further limit the Company's involvement in their governance or access to their
products. See "Business -- Chinese Joint Ventures."
EFFECT OF ANTIDUMPING CLAIMS
In May 1987, Commerce found that TRBs from certain countries, including the PRC,
were being sold in the U.S. at less than fair value. Commerce subsequently
issued antidumping orders imposing duties on the unfairly traded TRBs equal to
the percentage difference between the selling prices in the U.S. and the foreign
market value of the imported TRBs during specified review periods. The order
applied to the Company's joint venture, SGBC, as a result of its exports to the
Company from the PRC, although SGBC has never itself been found to have dumped
any bearings, and in each of four annual reviews of the antidumping order in
which SGBC was a respondent and Commerce issued a final determination, Commerce
imposed no antidumping margin on SGBC. In June 1995, SGBC requested a revocation
of the antidumping order with respect to its products. Commerce issued a
preliminary order granting such revocation based upon, among other factors, SGBC
not having sold TRBs at less than foreign market value for three consecutive
years. A final determination revoking the antidumping order as it applies to
SGBC would result in a direct benefit to the Company and SGBC by eliminating
costs associated with antidumping duties, yearly antidumping investigations and
other compliance requirements. However, there can be no assurance that there
will be a final determination revoking the antidumping order as it applies to
SGBC or that the Company or any of its sources and affiliated manufacturers will
not be subject to future antidumping claims. See "Business -- Manufacturing and
Sourcing."
PENDING LEGAL PROCEEDINGS
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 Trading Corp. ("Alurop"), WMW Machinery, Inc., a New
Jersey corporation ("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
Werkzeugmaschinenhandel GmbH im Aufbau ("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
11
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 dispute.
In February 1995, however, WMW 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
(collectively, "Defendants") 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 or its predecessors. Defendants
answered the complaint, denying the allegations therein, and WEMEX asserted
counterclaims against: (i) WMW for invoiced goods sold and delivered in the
amount of $9,507,337; (ii) Seymour I. Gussack and WMW Machinery Company, Inc.
("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 also have 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 also should 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. See "Business -- Legal Proceedings."
ENVIRONMENTAL COMPLIANCE
The Company's operations involve the handling and use of substances, such as
various cleaning fluids used to remove grease from metal, that are subject to
federal, state and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the soil, air and water and
establish standards for their storage and disposal. 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. The
Company and Gussack Realty Company ("Realty") are pursuing claims against Xerox
(in the United States District Court for the Southern District of New York)
related to the discharge by Xerox of contaminants into the subsurface at a
property in the vicinity of property formerly leased by the Company and owned by
Realty in Blauvelt, New York ("Blauvelt Property"). Realty and the Company,
among other things, allege that the subsurface discharge by Xerox has adversely
affected the Blauvelt Property. The New York State Department of Environmental
Conservation ("DEC") has held Xerox responsible for such discharges and Xerox
has entered into several consent orders with DEC since 1984 agreeing, among
other things, to investigate and remediate the impact of the discharges. Neither
DEC nor any other party has sought to impose liability on the Company or Realty
for the discharges or the costs of investigation or remediation. The Company
believes that it and Realty have meritorious claims against Xerox. However,
there can be no assurance that the Company and Realty will be successful in
their claims. See "Business -- Environmental Compliance."
12
DEPENDENCE ON EXISTING MANAGEMENT AND KEY PERSONNEL
Seymour I. Gussack, Chairman of the Board of Directors of the Company, has
been instrumental in the development and implementation of the Company's
business strategy since the Company's inception in 1958. David L. Gussack, the
Company's President, has been responsible for the daily operations of the
Company since 1991 and has participated in the development of the Company's
business strategy since 1987. Seymour I. Gussack currently devotes his time and
attention primarily to matters of business strategy rather than to the daily
operations of the Company. The loss or interruption of the continued services of
either Seymour I. Gussack or David L. Gussack could have a material adverse
effect on the Company. The Company has key man life insurance on Seymour I.
Gussack and David L. Gussack. See "Management."
TAX LOSS CARRYFORWARD
At December 30, 1995, the Company had net operating loss carry forwards
("NOLs") aggregating approximately $13.2 million, which expire in various years
through 2010. Under Section 382 of the Internal Revenue Code of 1986, as
amended, ("Code"), the amount of NOLs that can be used in any year is subject to
restriction if an ownership change occurs. Under Section 382 of the Code, an
"ownership change" occurs if the percentage of stock of the corporation owned
actually or constructively by one or more "5-percent Shareholders" increases by
more than 50 percentage points relative to the lowest percentage of stock of the
corporation owned by such 5-percent Shareholders at any time during the
statutory "testing period" (generally, the past three years). An ownership
change will not occur as a result of this Offering. A "5-percent Shareholder" is
a person who, at any time during the testing period, owns at least five percent
of the stock of the corporation (not including certain nonvoting,
nonparticipating preferred stock), and all stock owned by shareholders who are
not 5-percent Shareholders is generally treated as being owned by one 5-percent
Shareholder. Accordingly, future equity offerings by the Company or sales by its
principal stockholder could limit the use of NOLs. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this Offering, World will hold approximately 76.9% of the
Common Stock of the Company (74.3% if the Underwriters' over-allotment option is
exercised in full). As a result, World will be in a position to control the
management and policies of the Company, including, but not limited to, electing
or removing the Company's Board of Directors, changing the core business of the
Company, causing or restricting the sale of the Company, causing the Company to
engage in transactions with affiliated companies and controlling the Company's
dividend policy. World's two directors are Seymour I. Gussack and David L.
Gussack, who own 19.6% and 17.6%, respectively, of the Common Stock of World. In
addition, two other director designees of the Company, Harold S. Geneen and Nina
M. Gussack, own 19.6% and 17.6% of the Common Stock of World respectively. See
"Principal Stockholder."
RELATIONSHIP WITH WORLD; CONFLICTS OF INTEREST
The Company has engaged in certain transactions, and is a party to certain
arrangements, with World and its affiliates, which will continue after the
consummation of this Offering, including the purchase of bearings from joint
ventures in which World has an interest, payments for and advances to such joint
ventures by the Company and the sublease of a portion of the Company's principal
facilities. Two of the six persons who will be members of the Company's Board of
Directors also are directors and significant stockholders of World, and two
other persons who will be directors of the Company also are significant
stockholders of World. Ownership interests of directors of the Company in World
or service as a director of both the Company and World could create, or appear
to create, potential conflicts of interest. All future transactions between the
Company and World will be approved by a majority of the Board of Directors,
including a majority of the independent outside directors. See "Certain
Relationships and Related Transactions" and "Description of Securities."
13
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS
It is possible that the ability of the Company to issue Preferred Stock and
certain provisions of the General Corporation Law of the State of Delaware
("DGCL") may discourage other persons from making a tender offer for or
acquiring substantial amounts of the Company's Common Stock. This could have the
incidental effect of inhibiting changes in management and also may prevent
temporary fluctuations in the market price for the Common Stock which can result
from actual or rumored takeover attempts. In addition, the limited liability and
indemnification provisions of the Company's COI and Amended and Restated By-laws
("By-laws") may discourage stockholders from bringing a lawsuit against
directors for breaches of fiduciary duty and may also have the effect of
reducing the likelihood of derivative litigation against directors and officers
even though such action, if successful, might otherwise have benefitted the
Company and its stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent that costs of settlement and
damage awards against the Company's directors and officers are paid by the
Company pursuant to the indemnification provisions of its Certificate of
Incorporation or the indemnity provisions described above. See "Description of
Securities."
EFFECT OF BLANK CHECK PREFERRED STOCK
The authorized capital stock of the Company includes 1,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock"). The Board of
Directors is authorized to fix the rights, preferences, privileges and
restrictions of any series of Preferred Stock, including the dividend rights,
original issue price, conversion rights, voting rights, terms of redemption,
liquidation preferences and sinking fund terms thereof, and the number of shares
constituting any such series and the designation thereof and to increase or
decrease the number of shares of such series subsequent to the issuance of
shares of such series (but not below the number of shares of such series then
outstanding). Because the terms of the Preferred Stock can be fixed by the Board
of Directors without stockholder action, the Preferred Stock could be issued
quickly with terms calculated to defeat a proposed takeover of the Company or to
make the removal of management more difficult. The Board of Directors, without
stockholder approval, could issue Preferred Stock with dividend, voting and
conversion rights which could be superior to and thereby adversely affect the
rights of the holders of Common Stock. See "Description of Securities."
DILUTION
This Offering involves immediate and substantial dilution of $4.96 per share
(or 70.9%) between the net tangible book value per share of Common Stock after
this Offering and the per share public offering price. Based upon the initial
public offering price, World will own shares of Common Stock with a market value
of $21.0 million, and new investors in this Offering will be paying $6.3 million
for 23.1% of the shares of the Common Stock to be outstanding after completion
of this Offering, for a corporation with a net tangible book value of
approximately $7,965,000 or $2.04 per share, after giving effect to this
Offering. See "Dilution."
DIVIDEND POLICY
The Company's management expects that all of the Company's future earnings,
if any, will be retained for expansion or development of the Company's business
and that no dividends will be declared or paid for the foreseeable future. See
"Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there was no public market for the Common Stock. The
initial public offering price will be determined by negotiation between the
Company and the Representative and may not reflect the market price of the
Common Stock after this Offering. The Representative has advised the Company
that it intends to serve as a market maker for the Common Stock. See
"Underwriting" for factors considered in determining the initial public offering
price.
14
VOLATILITY OF SHARE PRICE; LACK OF ACTIVE TRADING MARKET
The trading price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results, general
trends in the Company's industry and other factors. The Company has applied for
inclusion of the Common Stock in the Nasdaq SmallCap Market and on the Pacific
Stock Exchange. There can be no assurance, however, that an active trading
market will develop in the Common Stock or that purchasers of the shares of
Common Stock will be able to resell their shares at prices equal to or greater
than the initial public offering price. The market for the Common Stock will
depend upon, among other things, the number of holders thereof, the interest of
securities dealers in maintaining a market for the Common Stock and other
factors beyond the control of the Company. The limited number of freely
tradeable shares available in this Offering may have a negative impact on the
development of an active trading market. The Company has been advised by the
Representative that it intends to seek market makers for the Common Stock, as
the Company understands commonly is the practice of managing underwriters in
connection with initial public offerings. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The Company is unable to predict the effect that sales made under Rule 144
under the Act (as defined below) or otherwise may have on the market price of
the Common Stock, but such sales could have a depressive effect in the public
market price of the Common Stock offered hereby and may impair the Company's
ability to raise additional capital by the sale of its equity securities. In
addition, as a result of its ability to control the Board of Directors, World
will have the ability to otherwise cause the Company to register under the Act
the 3,000,000 shares of the Common Stock that it owns. The Company will enter
into a registration rights agreement with World, providing the right to cause
the Company to register shares for resale by World or its transferees commencing
one year after the date of this Offering. World has agreed for a period of 18
months from the date of this Prospectus that it will not offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock, without the prior
written consent of the Representative. The holders of the Representative's
Warrants also have been granted registration rights with respect to the 90,000
shares of Common Stock underlying such warrants. See "Risk Factors -- Exercise
of Representative's Warrants," "Shares of Common Stock Eligible for Future Sale"
and "Underwriting."
EXERCISE OF REPRESENTATIVE'S WARRANTS
The Company has sold warrants for the purchase of Common Stock to the
Representative for nominal consideration as compensation for its services in
this Offering. The Representative's Warrants are exercisable only upon the
one-year anniversary of the closing of this Offering and will continue to be
exercisable until the five-year anniversary of the closing of this offering, at
a purchase price equal to 140% of the initial public offering price of the
Common Stock. The Representative's Warrants may have certain dilutive effects
because the holders thereof will be given the opportunity to profit from a rise
in the market price of the underlying shares of Common Stock with a resulting
dilution in the interest of the Company's other stockholders. The terms on which
the Company could obtain additional capital during the life of the
Representative's Warrants may be adversely affected because the holders of the
Representative's Warrants may exercise them at a time when the Company would
otherwise be able to obtain comparable additional capital in a new offering of
securities at a price per share greater than the exercise price of the
Representative's Warrants.
The Company has agreed that, at the request of the holders of the
Representative's Warrants under certain circumstances, it will register under
federal and state securities laws the Representative's Warrants and the shares
of Common Stock issuable thereunder. Exercise of these registration rights could
involve substantial expense to the Company at a time when the Company may not be
able to afford such expenditures and may adversely affect both the terms upon
which the Company may obtain additional funding and the market price of the
Common Stock. In addition, no prediction can be made as to the effect, if any,
that sales of shares of Common Stock or the availability of such shares of
Common Stock for sale will have on the market prices prevailing from time to
time. Nevertheless, the possibility that substantial amounts of Common Stock may
be sold in the public market upon the exercise of the Representative's Warrants
may adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Underwriting."
15
COMPANY HISTORY
The Company was founded in 1958 by Seymour I. Gussack, currently the
Chairman of the Board of Directors, as an engineering-oriented supplier which
designed bearings for a variety of special industrial applications. In 1965,
using its established sales force, the Company began marketing standard
precision bearings to OEMs. Product was manufactured by the Company and also
sourced from a network of overseas producers. In 1975, the Company formed its
Distribution Division, which sold the Company's full line of products, both
manufactured and imported, to industrial distributors throughout the U.S. In
1969, the Company built a manufacturing facility in North Carolina and moved its
domestic manufacturing operations there. Bearings and bearing components
produced at this facility were sold primarily to the automotive industry. Sales
of such products exceeded $18.0 million per year by 1985, when the Company sold
the facility to an unrelated company, Nucor, and executed a non-competition
agreement that expired in December 1991. The Company determined to sell the
facility in view of the price to be received and its then strategic plans,
including possible acquisitions then under consideration. In 1992, the Company
initiated a marketing campaign to the automotive industry, which yielded orders
from GM beginning in 1995.
In October 1987, the Company purchased the assets of Hyatt, which was then
in bankruptcy proceedings. Hyatt was primarily a manufacturer of TRBs for the
automotive and railroad industries. The Company borrowed $12.0 million from
Wells Fargo to finance the transaction and to provide the Company with working
capital. The transaction presented to the Company the opportunity to: (i)
acquire a large amount of equipment to establish new domestic manufacturing
capabilities and to form a manufacturing joint venture in the PRC; (ii) utilize
the well-recognized Hyatt(R) trademark and other intellectual property; (iii)
gain entry into the TRB market; and (iv) access the railroad market for
locomotive bearings. In 1985, Hyatt's last full year of production prior to
filing for bankruptcy protection, its sales were approximately $70.3 million, of
which approximately $11.0 million represented railroad product sales. In 1987,
portions of the assets acquired from Hyatt were used to establish a new TRB
manufacturing facility in Union, New Jersey.
In 1987, the Company also established a joint venture, SGBC, in Shanghai,
PRC. The joint venture agreement provided for SGBC to manufacture bearings and
bearing components. The Company's initial contribution to the joint venture was
the TRB production equipment acquired from Hyatt in 1986, including hot and cold
forming equipment, heat treating, machining, grinding and roller manufacturing
equipment to be used in a 100,000 square foot manufacturing facility in
Shanghai, PRC. Until 1994, the facility operated as a captive supply source to
the Company, exporting its production solely to the Company for sales in the
U.S. to Company customers. In 1994, SGBC was certified as a supplier of bearings
to Shanghai Volkswagen. Nonetheless, for the term of the joint venture SGBC
still may only sell in the U.S. to the Company. See "Business."
As a result of a number of factors, including litigation against the
municipality that precluded the Company from establishing a production facility
in New York adjacent to a Company distribution facility, the Company was delayed
in starting production of the Hyatt product lines, which, combined with the
requirements of establishing SGBC, adversely affected the Company's liquidity.
In September 1991, as a result of its continuing inability to meet interest
payments and related obligations under its loan agreements, principally its loan
agreement with Wells Fargo, the Company filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. In connection with its reorganization in bankruptcy,
the Company took significant steps to improve its operations and financial
position. These steps included consolidating operations and facilities, reducing
general, administrative and production costs, improving inventory management and
refocusing the Company on certain core businesses, including the sale of higher
margin TRBs of the Hyatt(R) brand. Partially as a result of these efforts, the
Company increased sales from approximately $27.3 million for fiscal 1993, the
last year in which the Company operated in bankruptcy, to approximately $37.0
million and $42.1 million for fiscal 1994 and fiscal 1995, respectively, and had
operating income of $874,000 for fiscal 1994 and of $354,000 for fiscal 1995,
despite an approximately $2.2 million charge in fiscal 1995 due to customer
damage claims, compared to an operating loss of $387,000 for fiscal 1993. During
the 1996 Interim Period, the Company recorded operating income of approximately
$2.4
16
million. In connection with the bankruptcy reorganization, the Company also used
proceeds from the liquidation of excess inventory to substantially reduce its
obligations under its Revolving Credit Facility. In December 1992, World, a
corporation controlled by Seymour I. Gussack and members of his family,
including David L. Gussack, currently the Company's President and Chief
Executive Officer, purchased the Discharged Obligation from Wells Fargo. The
Company's Plan of Reorganization was confirmed by the U.S. Bankruptcy Court for
the Southern District of New York in November 1993. In connection with the Plan
of Reorganization, the Company issued to World, in exchange for the Discharged
Obligation, the Secured Note, the Installment Note and 1,000 shares of Common
Stock (3,000,000 shares after giving effect to the 3000-for-one stock split
effective as of October 10, 1996), representing all of the Company's issued and
outstanding shares of capital stock. See "Certain Relationships and Related
Transactions."
17
DILUTION
At September 28, 1996, the net tangible book value of the Company was
approximately $2,665,000, or $.89 per share (assuming the 3,000-for-one stock
split effective as of October 10, 1996). Net tangible book value per share
represents the Company's total tangible assets less total liabilities divided by
the total number of shares of Common Stock outstanding. Net tangible book value
dilution per share represents the difference between the amount per share paid
by the purchasers of Common Stock in this Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
this Offering. After giving effect to the sale by the Company of the 900,000
shares of Common Stock offered hereby, at an assumed initial public offering
price of $7.00 per share, and receipt by the Company of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company at
September 28, 1996, would have been approximately $7,965,000, or $2.04 per
share. This represents an immediate increase in net tangible book value of $1.15
per share to existing holders of Common Stock and an immediate dilution of $4.96
per share to purchasers of shares of Common Stock in this Offering, as
illustrated by the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share (1) ............................ $ 7.00
Net tangible book value per share at September 28, 1996 (assuming the
3,000-for-one stock split effective as of October 10, 1996) .................. $ .89
Increase per share attributable to this Offering ............................... $1.15
-----
Pro forma net tangible book value per share after this Offering ................ $ 2.04
------
Dilution per share to new investors(2) ......................................... $4.96
=====
</TABLE>
- -----------
(1) Before deducting the estimated underwriting discounts, commissions and
expenses of this Offering.
(2) Excludes (i) 500,000 shares reserved for issuance under the 1996 Option
Plan, of which options to purchase 257,500 shares of Common Stock at the
price to the public in this Offering have been granted subject to certain
vesting periods, and (ii) 90,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants. See "Management -- 1996 Stock
Option and Performance Award Plan."
The following table summarizes, on a pro forma basis as of September 28,
1996, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing stockholder and by new public investors purchasing shares in
this Offering (at an assumed initial public offering price of $7.00 per share
and before deduction of estimated underwriting discounts and commissions and
offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder ................ 3,000,000(1) 76.9% $ 1(2) -- --
New public investors ................ 900,000 23.1% $6,300,000 100.0% $7.00
--------- ---- ---------- -----
Total ............................. 3,900,000 100.0% $6,300,001 100.0%
========= ===== ========== =====
</TABLE>
- -----------
(1) The number of shares owned by World reflects a 3,000-for-one stock split
effective as of October 10, 1996 which was effected in contemplation of
this Offering and reflected the proposed initial public offering price of
the Common Stock offered hereby determined by negotiation between the
Company and the Representative. Such offering price is not necessarily
related to the Company's asset value, net worth or any other established
criterion of value. For the method of determining the initial public
offering price of the Common Stock, see "Underwriting." Based upon
18
the initial public offering price, World will own shares of Common Stock
with a market value of $21.0 million, and new investors in this Offering
will be paying $6.3 million for 23.1% of the shares of the Common Stock to
be outstanding after completion of this Offering, for a corporation with a
net tangible book value of approximately $7,965,000 or $2.04 per share,
after giving effect to this Offering. The initial public offering price may
not reflect the market price of the Common Stock after this Offering.
(2) In December 1993, the Company emerged from a bankruptcy reorganization
which commenced in September 1991. In connection with its Plan of
Reorganization, the Company issued to World, which prior to this Offering
owned all of the Common Stock: (i) the Secured Note in the original
principal amount of $2.5 million; (ii) the Installment Note in the
principal amount of $750,142; and (iii) 1,000 shares of Common Stock
(3,000,000 after giving effect to a 3,000-for-one stock split effective as
of October 10, 1996). The Secured Note, Installment Note and 1,000 shares
of Common Stock were issued in exchange for a note in the original
principal amount of $12.0 million, together with accrued interest thereon
in the amount of $2,701,416. World acquired the Discharged Obligation from
Wells Fargo, which had provided financing for the Company's purchase of
Hyatt in March 1987 and for working capital.
19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 900,000 shares of
Common Stock being offered by the Company hereby, at an assumed initial public
offering price of $7.00 per share, after deducting estimated underwriting
discounts and commissions and expenses of this Offering payable by the Company,
are estimated to be approximately $5,099,500 ($5,935,825 if the Underwriter's
over-allotment option is exercised in full). The Company intends to use the net
proceeds approximately as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------ -------
<S> <C> <C>
Expansion of manufacturing capacity .......................... $2,000,000 39.2%
Expansion of marketing and research and development .......... 1,000,000 19.6%
Working capital, including general corporate purposes and
possible acquisitions ...................................... 2,099,500 41.2%
--------- ----
Total ...................................................... $5,099,500 100.0%
========== =====
</TABLE>
The Company anticipates using approximately $2.0 million to expand its
manufacturing capacity, particularly for the production of TRBs and ball
bearings supplied to the automotive industry, including possible investments in
joint ventures abroad or by providing equipment to vendors for use at their
facilities under the guidelines of certain supply agreements. As of the date
hereof, the Company has not committed to enter into any joint venture or other
arrangement with vendors that would be funded with the proceeds of this
Offering. Of the remaining net proceeds, the Company anticipates using
approximately $1.0 million for expanded marketing and research and development
and approximately $2.1 million for working capital, including general corporate
purposes and possibly the acquisition of the business or assets of other bearing
manufacturers. However, the Company at the present time has not identified any
acquisition candidates. Pending the application of the net proceeds for such
purposes, the Company intends to use such proceeds to repay outstanding
borrowings under the Revolving Credit Facility. As of January 24, 1997, the
Company had outstanding borrowings under the Revolving Credit Facility of
approximately $9,623,000. The Revolving Credit Facility currently terminates in
June 1998 and will remain available through that date, with or without repayment
of outstanding borrowings with the proceeds of this Offering. 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 (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 such formula and Overadvances, as of
December 11, 1996, the maximum amount the Company could borrow under the
Revolving Credit Facility was approximately $10,076,000. Amounts outstanding
under the Revolving Credit Facility bear interest at the bank's base rate (8.25%
per annum at January 24, 1997) plus 2%. Based upon the Company's performance
and 20 year relationship with BNYCC, the Company intends to seek and believes it
may be able to obtain more favorable terms on the Revolving Credit Facility upon
the completion of this Offering, although there can be no assurance it will be
able to do so. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition." The foregoing represents the Company's best
estimate of the allocation of the net proceeds of this Offering based upon
current economic and industry conditions and the current state of its business
operations and plans. The application of proceeds for any particular purpose
will depend on a number of factors, including the timing of expenditures, other
business and acquisition opportunities, and the availability of funds from
operations or other sources. As a result, the Company may find it desirable, and
reserves the right, to change the allocation of funds among the applications
identified above. None of the net proceeds of this Offering will be paid, in the
aggregate, to NASD members, affiliates, associated persons or related persons.
DIVIDEND POLICY
The Company currently expects that it will retain all future earnings for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company is
subject to restrictions against the payment of dividends under the terms of the
Revolving Credit Facility. See "Risk Factors -- Substantial Indebtedness;
Reliance on Borrowings under Revolving Credit Facility."
20
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 28, 1996 and as adjusted to give effect to: (i) the sale by the
Company of 900,000 shares of Common Stock at the assumed public offering price
of $7.00 per share, less estimated underwriting discounts and commissions and
expenses of this Offering payable by the Company; and (ii) the application of
the estimated net proceeds of this Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Note payable -- bank and current maturities of long-term debt . $10,521,272 $ 8,421,272(1)
=========== ===========
Long-term debt (less current maturities) ........................... $ 4,667,502 $ 4,667,502
----------- -----------
Stockholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000 shares
authorized; none issued ....................................... -- --
Common Stock, par value $.01 per share, 19,000,000 shares
authorized; 3,000,000 shares issued and outstanding;
3,900,000 shares issued and outstanding, as adjusted(2) ....... 30,000 39,000
Additional paid-in capital ...................................... 23,654,524 28,745,024
Accumulated deficit ............................................. (20,819,357) (20,819,357)
----------- -----------
Total stockholders' equity ...................................... 2,865,167 7,964,667
----------- -----------
Total capitalization .......................................... $ 7,532,669 $12,632,169
=========== ===========
</TABLE>
- ------------
(1) Pending the application of the net proceeds, the Company intends to use
such proceeds to repay outstanding borrowings under the Revolving Credit
Facility. The Revolving Credit Facility currently terminates in June 1998
and will remain available through that date, with or without repayment of
outstanding borrowings with the proceeds of this Offering. 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
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 (x) the
aggregate amount of outstanding letters of credit and (y) such reserves as
the lender may reasonably deem proper and necessary from time. See "Use of
Proceeds" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
(2) Excludes: (i) 500,000 shares of Common Stock reserved for issuance under
the 1996 Option Plan, of which options to purchase 257,500 shares of Common
Stock at the price offered to the public in this Offering have been granted
subject to certain vesting periods; and (ii) 90,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants.
21
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the financial statements and notes thereto that appear elsewhere
herein. The statement of operations and balance sheet data for the 1991, 1992,
1993, 1994 and 1995 fiscal years have been derived from the financial statements
of the Company, which financial statements have been compiled, but not audited,
with respect to the 1991 and 1992 fiscal years, and audited with respect to the
1993 and 1994 fiscal years by Ferro, Berdon & Company, L.L.P. independent public
accountants, as indicated in their report included elsewhere herein. The
financial statements as of and for the 1995 fiscal year have been audited by BDO
Seidman, LLP, independent public accountants, as indicated in their report
included elsewhere herein. The selected financial data as of and for the 1995
and 1996 Interim Periods have been derived without audit from the Company's
interim financial statements. In the opinion of Management, the unaudited
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of the results of
operations for the periods. The results for the 1996 Interim Period are not
necessarily indicative of the results that may be expected for 1996 fiscal year
or in any other future period.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------------- ----------------------------
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------ ------------- -------------
IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $ 32,146 $ 27,155 $ 27,254 $ 37,032 $ 42,070 $ 31,963 $ 29,800
Cost of sales 24,289 20,738 20,725 28,484 32,069 24,146 21,939
----------- ----------- ----------- ---------- ---------- ---------- -----------
Gross Profit 7,857 6,417 6,529 8,548 10,001 7,817 7,861
----------- ----------- ----------- ---------- ---------- ---------- -----------
Selling, general and administrative
expenses 8,806 6,762 6,916 7,674 7,495 5,548 5,568
Provision (Recovery) For Customer
Damage Claims(3) -- -- -- -- 2,152 2,152 (101)
----------- ----------- ----------- ---------- ---------- ---------- -----------
Operating income (loss) (949) (345) (387) 874 354 117 2,394
----------- ----------- ----------- ---------- ---------- ---------- -----------
Interest expense (2,517) (671) (513) (990) (1,428) (1,036) (969)
Equity in income (loss) of affiliate (390) (662) (183) 403 78 54 --
Other (expense) income 98 (76) 718 (32) (1,233) (1,118) --
----------- ----------- ----------- ---------- ---------- ---------- -----------
Income (loss) before reorganization
items, income tax (benefit) and
extraordinary item (3,758) (1,754) (365) 255 (2,229) (1,983) 1,425
----------- ----------- ----------- ---------- ---------- ---------- -----------
Reorganization items(1) (1,537) (7,715) -- -- -- -- --
Income tax (benefit) -- -- -- -- (500) -- 500
----------- ----------- ----------- ---------- ---------- ---------- -----------
Income (loss) before extraordinary
item (5,295) (9,469) (365) 255 (1,729) (1,983) 925
Extraordinary item(2) -- -- 4,384 108 -- -- --
----------- ----------- ----------- ---------- ---------- ---------- -----------
Net income (loss) $ (5,295) $ (9,469) $ 4,019 $ 363 $ (1,729) $ (1,983) $ 925
========== ========== ========== ========= ========= ========= ============
Net income (loss) per share (before
extraordinary item) $ (.22) $ (.39) $ (.02) $ .08 $ (.58) $ (.66) $ .31
Net income (loss) per share $ (.22) $ (.39) $ .17 $ .12 $ (.58) $ (.66) $ .31
========== ========== ========== ========= ========= ========= ============
Shares used in calculating net
income per share 24,000,000 24,000,000 23,125,000 3,000,000 3,000,000 3,000,000 3,000,000
========== ========== ========== ========= ========= ========= ============
</TABLE>
22
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------- NINE MONTHS
ENDED
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------ -------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 3,353 $ 3,091 $ 3,842 $ 4,686 $ 2,793 $ 3,740
Total assets 28,319 15,913 17,618 24,143 27,086 24,399
Long-term debt (excluding current portion) 14,850 14,920 4,512 5,218 4,817 4,668
Stockholders' equity (5,969) (15,265) 3,306 3,670 1,941 2,865
</TABLE>
- -------------
(1) On September 16, 1991, the Company filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code. As part of its bankruptcy
reorganization, the Company incurred losses on: (i) the liquidation of
inventory of approximately $4.9 million; (ii) the write-down of plant and
equipment of approximately $3.0 million; (iii) the write down of intangible
assets of $1.0 million; and (iv) bankruptcy costs of approximately $360,000
in fiscal 1991 and 1992.
(2) In December 1993, the Company emerged from a bankruptcy reorganization which
commenced in September 1991. 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, the Secured Note, the Installment Note and 1,000
shares of Common Stock (3,000,000 shares after giving effect to the
3000-for-one stock split effective as of October 10, 1996) in exchange for
the Discharged Obligation. World acquired the Discharged Obligation from
Wells Fargo, which provided financing for the Company's purchase of Hyatt in
March 1987 and for working capital. The difference between the amount of the
Discharged Obligation and the principal amounts of the notes and the value
attributed to the Common Stock issued to World in exchange for the
Discharged Obligation, $11,451,274, has been recorded as a contribution to
capital. In addition, unsecured creditors were offered a cash settlement
equal to 5% of their outstanding pre-petition claims or, in the alternative,
10% of such claims, payable 2% per year for five years resulting in a
reduction in obligations of $3,974,380. See "Risk Factors -- Bankruptcy
Reorganization," "Company History," "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Note 14 of Notes to
Consolidated Financial Statements.
(3) In April 1995, three railroads reported to the AAR problems with a total of
eight bearing assemblies which had overheated due to friction that was
attributed to misplaced seals on the Company's tapered journal bearings. The
Company agreed with AAR to recall and replace all Company tapered journal
bearings that had been shipped. In anticipation of the expenses related to
the reimbursement, recall and rework, the Company accrued a one-time charge
of approximately $2.2 million in fiscal 1995. See "Risk Factors -- Product
Recall."
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this Prospectus. Historical
operating results and percentage relationships among any amounts included in the
Financial Statements are not necessarily indicative of trends in operating
results.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
the Company's sales represented by each income statement line item presented.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
--------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
---------------------------- ------------------------------------------
SEPTEMBER 30, SEPTEMBER 28, DECEMBER 25, DECEMBER 31, DECEMBER 30,
1995 1996 1993 1994 1995
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales .............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................... 75.5 73.6 76.0 76.9 76.2
Gross profit ....................... 24.5 26.4 24.0 23.1 23.8
Selling, general and administrative
expenses ......................... 17.4 18.7 25.4 20.7 17.8
Operating income (loss) ............ 0.4 8.0 (1.4) 2.4 0.8
Other (income) expense ............. 6.6 3.3 (0.1) 1.7 6.1
Income (loss) before extraordinary
item ............................. (6.2) 3.1 (1.3) 0.7 (4.1)
Net income (loss) .................. (6.2) 3.1 14.7 1.0 (4.1)
==== === ==== === ====
</TABLE>
1996 INTERIM PERIOD COMPARED TO 1995 INTERIM PERIOD (UNAUDITED)
Sales. The Company's sales decreased 6.8% from approximately $32.0 million
for the 1995 Interim Period to approximately $29.8 million for the 1996 Interim
Period. Sales of the OEM Division and the Distribution Division represented 64%
and 36% of total sales for 1996 Interim Period, respectively, as compared to 65%
and 35% of total sales for the 1995 Interim Period. The decrease in sales
between the two periods reflected a 28% to 30% decline in the production of
truck trailers, which resulted in a reduction of truck trailer bearing sales of
approximately $2.5 million, despite an increase in the Company's market share
for such bearings. The Company expects that sales of bearings for truck trailers
for the remainder of fiscal 1996 will decrease in part as the result of the
filing for bankruptcy protection by two leading truck trailer manufacturers. 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 low margin commodity bearings. These decreases in sales
were partially offset by an increase of approximately $1.1 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 75.5% for the 1995 Interim Period to 73.6% for the 1996 Interim
Period. 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 and is not completed as of the date of this Prospectus. To date, the cost
of consolidation has not been material and has been expensed as a 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
24
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 remained constant at approximately $5.6 million for each
of the 1995 and 1996 Interim Periods, although, as a percentage of sales, such
expenses increased from 17.4% to 18.7%, 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 the 1995 Interim Period representing
estimated liability for rework costs and customer damage claims. In comparison,
during the 1996 Interim Period, the Company recorded a credit of approximately
$101,000, 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. See "Risk Factors -- Product Recall."
Operating Income. Operating income increased to approximately $2.4 million
for the 1996 Interim Period from approximately $117,000 for the 1995 Interim
Period, which was the result of a customer damage claim of approximately $2.2
million recorded in fiscal 1995.
Other Income (Expense). Other expenses decreased by 54% from approximately
$2.1 million for the 1995 Interim Period to $969,000 for the 1996 Interim
Period. The 1995 Interim Period included write-offs of the balance of the
Company's (i) equity investment in a subsidiary ($960,000) since the sole asset
of such subsidiary was the subject of a dispute with the Company's joint venture
partner which the Company determined it would be unable to amicably resolve and
(ii) goodwill ($93,333) due to the limited cash flow from an earlier investment.
Due to the lack of significant sales relating to the investment, the Company
determined that the goodwill was impaired and therefore wrote off the goodwill.
Income Tax (Benefit). The Company accrued $500,000 for federal, state and
local taxes on income during the 1996 Interim Period compared to no provision
for taxes for the 1995 Interim Period, during which the Company had a loss. The
Company will be able to use its past net operating losses to offset its tax
liability for fiscal 1996.
Net Income (Loss). As a result of the factors discussed above, net income
increased to $924,000 for the 1996 Interim Period from a net loss of
approximately $2.0 million for the 1995 Interim Period.
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.
25
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. See "Risk Factors -- Product
Recall."
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
the 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.
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.
FISCAL 1994 COMPARED TO FISCAL 1993
Sales. The Company's sales increased by 35.9% to approximately $37.0 million
for fiscal 1994 from approximately $27.3 million for fiscal 1993. The increase
was attributable to overall increases in orders from existing customers,
particularly sales in the Truck Trailer market, following the Company's
emergence from bankruptcy proceedings. Sales of the OEM Division increased 59.7%
to approximately $23.8 million in fiscal 1994 from approximately $14.9 million
in fiscal 1993 and represented 64% of total sales in fiscal 1994 compared to 55%
of total sales in fiscal 1993. This increase included increased ball bearings
sales of approximately $2.3 million, increased tapered roller bearings sales of
approximately $4.9 million, and increased bearing component sales of
approximately $1.4 million. Sales of the Distribution Division increased 6.7% to
approximately $13.3 million in fiscal 1994 from approximately $12.4 million in
fiscal 1993 and represented 36% of total sales in fiscal 1994 compared to 45% of
total sales in fiscal 1993.
Cost of Sales. Cost of sales increased by 37.4% to approximately $28.5
million for fiscal 1994 from approximately $20.7 million for fiscal 1993. Cost
of sales as a percentage of sales increased to 76.9% in fiscal 1994 from 76.0%
in fiscal 1993 due to cost increases from certain component and raw material
vendors, which the Company could not completely pass through to customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 11% to approximately $7.7 million from
approximately $6.9 million in fiscal 1993. However, such expenses decreased as a
percentage of sales to 20.7% in fiscal 1994 from 25.4% in fiscal 1993 due to
increasing sales while controlling costs.
Operating Income. As a result of the factors discussed above, operating
income was approximately $874,000 for fiscal 1994, compared to an operating loss
of approximately $387,000 for fiscal 1993.
Other Income (Expense). Other expense increased to approximately $619,000
for fiscal 1994 compared to other income of approximately $22,000 for fiscal
1993. The increase reflected a 93% increase in interest expense to approximately
$1.0 million, for fiscal 1994 from approximately $513,000
26
primarily as a result of increased borrowings required to finance increases in
sales, offset in part by decreased average interest rates during fiscal 1994.
Interest expense during fiscal 1994 also included $210,000 accrued with respect
to the Secured Note and 6% loans due December 1995 in the aggregate principal
amount of $1.0 million, each owed to World. In fiscal 1994, the Company also
recognized equity in the income of an affiliate of approximately $403,000
compared to equity in the loss of an affiliate and other unconsolidated
subsidiaries of approximately $183,000 during fiscal 1993. During fiscal 1994,
the Company also had other expense of approximately $32,000, compared to other
income of $717,355 during fiscal 1993 due, in part, to a recovery of legal fees
from a settled lawsuit and the refund of a cash deposit and interest thereon
from the U.S. Customs Service.
Net Income. The Company had net income of approximately $363,000 for fiscal
1994, reflecting increased sales and operating income, partially offset by
increased interest expense. For fiscal 1993, the Company had net income of
approximately $4.0 million as a result of extraordinary income of $4.4 resulting
from the settlement of debts at a discount in the Company's bankruptcy
reorganization. Before giving effect to extraordinary income, the Company had a
loss for fiscal 1993 of approximately $365,000.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 30, 1995, 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. Since the recall, sales of tapered journal bearings have not
attained previous levels. These demands have been met through cash from
operations and borrowings under the Revolving Credit Facility.
The Company's arrangements with its North American customers typically
provide that payments are due within 30 days following the date of the Company's
shipment of goods, while arrangements with foreign customers are generally on a
letter of credit basis. Due to the continuing expansion of the Company's sales,
management believes that the Company's working capital requirements will
increase. The Company expects to fulfill this need with a portion of the
proceeds of this Offering.
At December 31, 1994, December 30, 1995, and September 28, 1996, the Company
had working capital of approximately $4.7 million, $2.8 million and $3.7
million, respectively. Cash flow from operations for 1995 was $194,000 as
compared to cash outflow of $4.7 million during 1994. The improvement in the
Company's cash flow from operations primarily reflects an increase in results of
operations in 1995, offset by the effects of the tapered journal bearing recall.
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 to
fund operations. As of December 11, 1996, $9,450,000 was outstanding under the
Revolving Credit Facility, which sums are secured by the Company's accounts
receivable, inventory and various other assets. The Revolving Credit Facility
currently terminates in June 1998 and will remain available through that date,
with or without payment of outstanding borrowings with the proceeds of this
Offering. 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
such formula and Overadvances, as of December 11, 1996, the maximum
27
amount the Company could borrow under the Revolving Credit Facility was
approximately $10,076,000. Amounts outstanding under the Revolving Credit
Facility bear interest at the bank's base rate from time to time (8.25% per
annum at December 11, 1996), plus 2%. Based upon the Company's performance and
20 year relationship with BNYCC, The Company intends to request and believes it
may be able to obtain more favorable terms on the Revolving Credit Facility upon
completion of this Offering, although there can be no assurance that 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. As of September 28, 1996, the Company was required to
maintain a tangible net worth, as defined, of $2,835,000, a fixed charge ratio
of 1.3 to 1.0 and a ratio of current assets to current liabilities of .90 to
1.0. The Company's actual results as of September 28, 1996 reflected a tangible
net worth of $4,511,000, a fixed charge ratio of 1.85 to 1.0 and a ratio of
current assets to current liabilities of 1.22 to 1.0. As of September 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 in term 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.
In connection with the Company's bankruptcy reorganization, the Company
issued the Secured Note and the Installment Note to World. The Installment Note
does not bear interest. Interest on the Secured Note accrues annually on the
initial principal amount but only is payable to the extent of net income in
excess of $400,000. The Company has accrued $412,500 in unpaid interest under
the Secured Note as of September 28, 1996. The Secured Note is subordinated in
right of payment to all other creditors of the Company but is secured by a
second lien on certain machines and equipment of the Company with an aggregate
value of approximately $1.4 million. See "Certain Relationships and Related
Transactions."
The Company believes that funds generated from continuing operations, the
net proceeds of this 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 the next 24 months.
INFLATION
The effect of inflation on the Company has not been significant during the
last two fiscal years.
28
BUSINESS
The 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 OEMs and the
industrial aftermarket principally in the U.S. and Canada. The Company's
products are used in a broad range of applications, including automobiles,
railroad cars, locomotives, trucks, 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 GM, Gunite, Strick,
Trinity, Burlington Northern and Xerox. The Distribution Division has customers
ranging in size from Motion Industries and Bearings, Inc., each of which has
over 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 component 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 AAR and the MIL-I-45208 standard
by General Dynamics, a military contractor. The Company currently is
taking steps to obtain IS0 9001 and QS 9000 registrations from the 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 locomotives and railroad cars. In
addition, the Company has been qualified as an authorized supplier by
leading automobile and truck trailer manufacturers (including GM,
Freuhauf, Gunite, Stoughton and Strick), railroads (including Burlington
Northern, Santa Fe, Missouri Pacific, Southern Pacific and Norfolk
Southern) and national distributors of bearings (including Motion
Industries and Bearings, Inc.). These certifications and qualifications,
which 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.
* PRESENCE IN CHINA. In 1987, the Company formed a joint venture, SGBC, in
the 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, Commerce has granted a preliminary order with
respect to SGBC revoking the applicability to it of an antidumping order
covering TRBs issued in 1987. A final determination revoking the
antidumping order as it applies to SGBC would result in a direct benefit
to the Company and SGBC by eliminating costs associated with antidumping
duties, yearly antidumping investigations and other compliance
requirements related thereto. There cannot be any assurance that Commerce
finally will determine to revoke the antidumping order as it applies to
SGBC. However, in each of the four annual reviews of the antidumping order
in which SGBC was a respondent and Commerce made a final determination,
Commerce imposed no antidumping margin on SGBC. The Company knows of no
such revocations pending for other companies and believes its own
revocation, if granted, will provide 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
29
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 marketplace, 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
1995.
* 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, 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 $42.1 million in fiscal
1995, and reported operating income of $354,000 for fiscal 1995, compared
to an operating loss of $387,000 for fiscal 1993. Primarily as a result of
a charge due to customer damage claims connected with a product recall of
certain tapered journal bearings, the Company incurred a loss of
approximately $1.7 million for fiscal 1995. However, during the 1996
Interim Period, the Company recorded operating income of approximately
$2.4 million. During the bankruptcy, the Company lost its status as an
approved vendor to certain distributors of bearings and bearing products.
Although there cannot be any assurance that it will be the case, and while
the Company has no basis for determining the effect of the product recall
on customer confidence, the Company believes that as a result of this
Offering it may be redesignated as an approved vendor by certain of such
distributors, enabling the Company to increase its distribution sales and
this 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 TRBs, $900 million of other types of roller bearings, $450
million of mounted units and $589 million of bearing components. Timken
dominates the TRB market with estimated sales in excess of $1 billion. The
Company competes in segments of each of these bearing classifications. The
antifriction bearings 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, drive trains and
transmissions), railcar and locomotive (e.g., wheel and axle assemblies),
30
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 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 TRBs, 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 TRBs imported from the PRC since 1991,
based upon Commerce's final determination as to the fairness of SGBC's pricing
that year. Based on such determination and preliminary determinations for
subsequent years, SGBC recently requested a revocation of the applicability of
the antidumping order to it. As of October 1996, the Company believes SGBC is
the only TRB producer in the PRC to have received a preliminary revocation of
the antidumping duty order.
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 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
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.
31
The Company has the exclusive right to sell the products of SGBC in the U.S.
In 1994 and 1995, the Company imported $4,900,000 and $5,500,000, 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
("KQGBC") subject to its formation. KQGBC is 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 for approval 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.
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
will be assumed by Wafangdian General Bearing Co., Ltd. ("WGBC"), a new joint
venture between World and Wafangdian Bearing Company. In its initial stage, 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, WGBC will produce railroad bearings
for sale in U.S.
by the Company.
Hyatt-ZWZ is a New York corporation whose share capital is owned 65% by the
Company and 35% by WBF. The Company initially contributed $130,000 in capital
equipment and cash to Hyatt-ZWZ. Hyatt- ZWZ purchases (from Wafangdian-Hyatt and
others) and manufactures components for railroad bearing products exclusively
for worldwide distribution by the Company. In 1994 and 1995, the Company
purchased $1,263,012 and $965,159 of bearings, respectively, from Hyatt-ZWZ.
32
Governance, operations, distributions and dissolution of Hyatt-ZWZ are
governed by New York law and by the terms of the joint venture contract.
Hyatt-ZWZ's seven-member Board of Directors, which consists of three directors
(including its Chairman) chosen by WBF and four directors (including its
Vice-Chairman) chosen by the Company, must unanimously approve all significant
corporate actions.
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 Wafandgian General Bearing Company, Ltd.
("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.
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.
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. 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.
SALES, MARKETING AND CUSTOMERS
The Company markets its products in the U.S. and abroad through nine
salaried sales employees as well as 33 commissioned independent sales
representative organizations, aggregating 92 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.
33
The Company participates in trade shows sponsored by the Truck Maintenance
Council, Society of Automotive Engineers and the Railway Supply Association. The
Company's advertising budget for fiscal 1996 is $50,000 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 Bearings, Inc., 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 TRBs. The OEM Division
focuses on the transportation industry, specialty truck 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 1995.
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 September 28, 1996, in excess of 90% of
accounts receivable were current or less than 30 days past due. Approximately
3.7% of accounts receivable were over 90 days old as of September 28, 1996.
EMPLOYEES
As of August 31, 1996, the Company had 172 full-time employees, of whom 122
were engaged in production, shipping and receiving and maintenance, and 16 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.
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
34
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.
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 "Certain Relationships and Related 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 $238,000, $204,000 and $204,000 in 1993, 1994 and
1995, respectively. Rent expense was approximately $153,000 and $162,000 for
each of the 1995 and 1996 Interim Periods, respectively.
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. The Company and Realty are
pursuing claims against Xerox in the United States District Court for the
Southern District of New York related to the discharge by Xerox of contaminants
into the subsurface at a property in the vicinity of the Blauvelt Property.
Realty and the Company, among other things, allege that the subsurface discharge
by Xerox has adversely affected the Blauvelt Property. The DEC has held Xerox
responsible for such discharges and Xerox has entered into several consent
orders with DEC agreeing, among other things, to investigate and remediate the
impact of the discharges. Neither DEC nor any other party has sought to impose
liability on the Company or Realty for the discharges or the costs of
investigation or remediation. The Company believes that it and Realty have
meritorious claims against Xerox. However, there can be no assurance that the
Company and Realty will be successful in their claims.
LEGAL PROCEEDINGS
On August 25, 1986, Timken, a U.S. producer of TRBs, filed a petition on
behalf of the U.S. TRB industry with both the ITC and Commerce seeking the
imposition of antidumping duties on imports of TRBs from Japan, Italy, the
former Yugoslavia, Romania, Hungary and the PRC. In May 1987,
35
Commerce found that TRBs 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 TRBs (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 TRBs equal to the percentage difference
between the selling prices in the U.S. and the foreign market value of the
imported TRBs 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. The Company, as
an importer of TRBs from SGBC, has not been required to post cash deposits since
1991, when Commerce allotted a 0% dumping margin to SGBC. In June 1995, SGBC
requested a revocation of the order imposing antidumping duties on it with
respect to its products. Commerce issued a preliminary order granting such
revocation based upon, among other factors, the fact that SGBC had not sold TRBs
at less than foreign market value for three consecutive years.
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.
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.
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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 Designee
Harold S. Geneen .......... 86 Director Designee
Nina M. Gussack ........... 41 Director Designee
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
</TABLE>
Set forth below is certain additional information with respect to the
Directors, executive officers and Director Designees of the Company. Robert E.
Baruc, Harold S. Geneen and Nina M. Gussack will be appointed as Directors upon
completion of this Offering.
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).
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).
37
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 agreed to serve as a Director of the Company upon the
completion of this Offering. 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 agreed to serve as a Director of the Company upon the
completion of this Offering. 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 agreed to serve as a Director of the Company upon the
completion of this Offering. Ms. Gussack has been litigation partner at the law
firm of Pepper, Hamilton, & Scheetz in Philadelphia, Pennsylvania since 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. See "Company
History."
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 will consist 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
38
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 will consist 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.
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 30, 1995:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
-------------------------- -------------------------------------
RESTRICTED
FISCAL STOCK STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS# COMPENSATION
--------------------------- ---- ------ ----- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
David L. Gussack, President 1995 $155,232 $5,000 0 0 $28,000(2)
</TABLE>
(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.
1996 STOCK OPTION AND PERFORMANCE AWARD PLAN
Upon the successful completion of this Offering, the Company will adopt the
1996 Option Plan, which authorizes the grant to directors, officers and key
employees of the Company and any parent or subsidiary of the Company, of
incentive or non-qualified stock options, performance shares, restricted shares
and performance units. The 1996 Option Plan covers up to 500,000 shares of the
Company's Common Stock. Options to purchase 257,500 shares at this Offering
price per share were granted certain officers, directors and other key
employees, subject to the closing of this Offering.
The 1996 Option Plan will be administered by a committee ("Stock Option
Committee") consisting of Messrs. Harold S. Geneen and Robert E. Baruc. The
Stock Option Committee determines the prices and terms at which options may be
granted. Options may be exercisable in installments over the option period, but
no options may be exercised after ten years from the date of grant.
The exercise 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
39
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.
At the time each grant of shares is made, the Stock Option Committee will
determine the duration of the performance or restriction period, if any, the
performance targets, if any, and the times at which restrictions placed on
restricted shares shall lapse.
DIRECTOR COMPENSATION
The members of the Company's Board of Directors are not compensated for
their service on the Board, but are reimbursed for out-of-pocket and travel
expenses incurred in attending Board meetings. Directors will participate in the
1996 Option Plan.
40
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, the
Secured Note, the Installment Note, 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 the Discharged Obligation. World acquired for
approximately $2.0 million the Discharged Obligation 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 $1.4
million at December 30, 1995. 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 $412,500 in
interest thereon. World agreed to defer the payment under the Installment Note
for fiscal 1993 and fiscal 1994, and received principal payments of $375,000
during fiscal 1995, which included the two installments previously deferred. The
Installment Note does not bear interest. During 1993 and 1994, World lent
$1,000,000 to the Company, with interest payable quarterly at the rate of 6% per
annum. The loan was repaid in full in December 1995, and interest payments for
fiscal 1994 and fiscal 1995 were made in the amount of $45,000 each year.
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 or a Director designee 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 1993, 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 $679,586 from the Job Development Authority of Rockland
County and a mortgage loan currently in the principal amount of $543,750 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 1993, 1994 and 1995 of approximately $786,000, $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
41
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 $84,000, $1,708,000, $1,742,000 and
$1,262,000 and $1,204,000 for 1993, 1994, 1995 and the 1995 and 1996 Interim
Periods, respectively. The advances did not bear interest through the end of
fiscal 1995, however, effective December 31, 1995, the balances bear interest at
8% 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
$0, $600,000, $2,650,000 and $2,528,000 and $362,000 for 1993, 1994, 1995 and
the 1995 and 1996 Interim Periods, respectively. Following the completion of
this Offering, 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 this Offering, the Company will cease 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 this 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.
REGISTRATION RIGHTS AGREEMENT
World has certain rights with respect to the registration under 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
42
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 one year after the date of this
Prospectus, 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 this Prospectus. 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.
FUTURE TRANSACTIONS
The Company believes, based upon an informal survey of rents in the area,
that its transactions with Realty and its sublease with World approximate fair
market value, however it has no basis upon which to determine if the terms of
other past transactions with World and its affiliates have been at least as
favorable to the Company as those that could have been obtained from unrelated
parties. However, all future transactions between the Company and its officers,
directors, principal shareholders and affiliates will be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unrelated third
parties.
43
PRINCIPAL STOCKHOLDER
The following table sets forth, as of the date of this Prospectus, and as
adjusted to reflect the sale of the 900,000 shares of Common Stock offered
hereby, 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.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)(2)
SHARES ------------------------
BENEFICIALY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(3) OFFERING OFFERING
--------------------------------------- ----------- -------- --------
<S> <C> <C> <C>
World Machinery Company .............................. 3,000,000 100.0% 76.9%
44 High Street
West Nyack, New York 10994
</TABLE>
- ------------
(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) Assumes the Underwriters' over-allotment option is not exercised. If such
option is exercised, the percentage of the issued and outstanding Common
Stock owned by World will be reduced to 74.3%.
(3) Seymour I. Gussack, the Company's Chairman of the Board and David L.
Gussack, the Company's President, own or control approximately 19.6% 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 41.2% of the stock of World. Harold S. Geneen, a Director
Designee 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. Seymour I. Gussack, David
L. Gussack, Robert E. Baruc, a director, and Realty have expressed an
interest to purchase in the Offering 4,000, 2,000, 1,000 and 5,000 shares
of Common Stock, respectively, subject to availability.
44
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 19,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, $.01 par value
per share. Upon completion of this Offering, there will be 3,900,000 shares of
Common Stock and no shares of Preferred Stock issued and outstanding.
The following summary is qualified in its entirety by reference to the COI
and By-laws, a copy of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Each holder of Common Stock is entitled to cast one vote, either in person
or by proxy, for each share of Common Stock owned of record on the record date
(as defined in the By-laws) on all matters submitted to a vote of stockholders,
including the election of directors. The holders of Common Stock do not possess
cumulative voting rights, which means that the holders of more than 50% of the
outstanding shares voting for the election of the class of directors to be
elected by the Common Stock can elect all of such directors, and, in such event,
the holders of the remaining shares of Common Stock will be unable to elect any
of the Company's directors.
Holders of outstanding shares of Common Stock are entitled to share ratably
in such dividends as may be declared by the Board of Directors out of funds
legally available therefor. Upon the liquidation, dissolution, or winding up of
the Company, each outstanding share of Common Stock will be entitled to share
equally in the assets of the Company legally available for distribution to
stockholders after the payment of all debts and other liabilities, subject to
any superior rights of the holders of any outstanding shares of Preferred Stock.
Holders of the shares of Common Stock have no preemptive rights. There are
no conversion or subscription rights, and shares of Common Stock are not subject
to redemption. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby will be, when issued and paid for in accordance
with the terms thereof, duly authorized and issued, fully paid and
nonassessable.
PREFERRED STOCK
The authorized capital stock of the Company includes 1,000,000 shares of
Preferred Stock. The Board of Directors is authorized to fix the rights,
preferences, privileges and restrictions of any series of Preferred Stock,
including the dividend rights, original issue price, conversion rights, voting
rights, terms of redemption, liquidation preferences and sinking fund terms
thereof, and the number of shares constituting any such series and the
designation thereof and to increase or decrease the number of shares of such
series subsequent to the issuance of shares of such series (but not below the
number of shares of such series then outstanding). Because the terms of the
Preferred Stock can be fixed by the Board of Directors without stockholder
action, the Preferred Stock could be issued quickly with terms calculated to
defeat a proposed takeover of the Company or to make the removal of management
more difficult. The Board of Directors, without stockholder approval, could
issue Preferred Stock with dividend, voting and conversion rights which could
adversely affect the rights of the holders of Common Stock. At present, the
Company has no plans to issue any Preferred Stock.
CERTAIN DELAWARE LAW PROVISIONS
Section 203 of the DGCL prevents an "interested stockholder" (defined in DGCL
Section 203, generally, as a person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as defined
in DGCL Section 203) with a publicly held Delaware corporation for three years
following the date such person became an interested stockholder unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation
45
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the date on which
such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. DGCL Section 203 may have a depressive effect on the market price
of the Common Stock offered hereby.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COI AND BY-LAWS
Certain provisions of the COI and By-laws of the Company summarized in the
following paragraphs will become operative prior to consummation of this
Offering and may be deemed to have an anti-takeover effect and may delay or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interest, including those attempts that might result in a premium over
the market price for the shares of Common Stock held by such stockholders. These
provisions also may have a depressive effect on the market price of the Common
Stock.
Special Meeting of Stockholders. The COI provides that special meetings of
stockholders of the Company may be called only by the Board of Directors. This
provision makes it more difficult for stockholders to take action opposed by the
Board of Directors. The approval of the holders of two-thirds of the Company's
outstanding Common Stock is necessary to amend or repeal this provision of the
Company's Certificate of Incorporation.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company: (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after anniversary date of the immediately preceding
annual meeting of stockholders, not fewer than 60 days nor more than 90 days
prior to such anniversary date; and (ii) in the case of the annual meeting to be
held during the first complete fiscal year following the date of this Prospectus
or that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, or in the case of
a special meeting of stockholders called for the purpose of electing directors,
no later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The By-laws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting. As set forth below, the By-laws may
not be amended or repealed by the stockholders of the Company, except with the
approval of holders of two-thirds of the Company's outstanding Common Stock.
Adjournment of Meetings of Stockholders. The By-laws provide that when a
meeting of stockholders of the Company is convened, the presiding officer, if
directed by the Board of Directors, may adjourn the meeting if: (i) no quorum is
present for the transaction of business; or (ii) the Board of Directors
determines that adjournment is necessary or appropriate to enable the
stockholders to consider fully information the Board of Directors determines has
not been made sufficiently or timely available to stockholders or to otherwise
effectively exercise their voting rights. This provision will, under certain
circumstances, make more difficult or delay actions by the stockholders opposed
by the Board of Directors. The effect of such provision could be to delay the
timing of a stockholders' meeting, including in cases where stockholders have
brought proposals before the stockholders that are in
46
opposition to those brought by the Board of Directors and therefore may provide
the Board of Directors with additional flexibility in responding to such
stockholder proposals. As set forth below, the By-laws may not be amended or
repealed by the stockholders of the Company, except with the approval of holders
of two-thirds of the Company's outstanding Common Stock.
Amendment of the By-laws. The COI provides that the By-laws may be amended
or repealed by the Board of Directors and may not be amended or repealed by the
stockholders of the Company, except with the consent of holders of two-thirds of
the Company's outstanding Common Stock. This provision will make it more
difficult for stockholders to make changes to the By-laws that are opposed by
the Board of Directors. This provision of the COI may not be amended or repealed
by the stockholders of the Company, except with the approval of the holders of
two-thirds of the Company's outstanding Common Stock.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is American Stock Transfer
& Trust Co., 40 Wall Street, New York, New York 10005.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
The Company has 3,900,000 shares of Common Stock issued and outstanding. Of
these shares, 900,000 shares of Common Stock registered in this Offering
(1,035,000 if the over-allotment option is exercised) will be freely tradeable
without restriction or further registration under the Act, except for shares
purchased by affiliates of the Company, which will be subject to certain resale
limitations of Rule 144 under the Act. The remaining 3,000,000 shares were
initially issued and sold by the Company in December 1993 as 1000 shares which
were subject to a 3000-for-one stock split effective as of October 10, 1996.
In general, Rule 144, as currently in effect, subject to the satisfaction of
certain conditions, provides that a person, including an affiliate of the
Company, who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of one percent of the total number of
outstanding shares of Common Stock or the average weekly trading volume of
shares of Common Stock during the four calendar weeks preceding the sale. A
person who has not been an affiliate of the Company for at least the three month
period immediately preceding the sale and who has beneficially owned shares of
Common Stock for at least three years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
47
UNDERWRITING
The Underwriters named below have agreed, subject to the terms and
conditions of the Underwriting Agreement between the Company and H.J. Meyers &
Co., Inc., as Representative of the Underwriters, to purchase from the Company
the number of shares of Common Stock set forth opposite their names. The 9%
underwriting discount set forth on the cover page of this Prospectus will be
allowed to the Underwriters at the time of delivery to the Underwriters of the
shares of Common Stock so purchased.
NUMBER OF
SHARES
NAME OF UNDERWRITER PURCHASED
------------------- ---------
H.J. Meyers & Co., Inc. ....................................
---------
TOTAL .................................................... 900,000
=========
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the front cover page of this Prospectus, and at such price less a
concession not in excess of $______ per share of Common Stock to certain dealers
who are members of the National Association of Securities Dealers, Inc., of
which the Underwriters may allow and such dealers may reallow concessions not in
excess of $______ per share of Common Stock to certain other dealers. The public
offering price and concession and discount may be changed by the Underwriters
after the initial public offering.
The Company has granted to the Underwriters an over-allotment option
expiring at the close of business on the 45th business day subsequent to the
date of this Prospectus, to purchase up to an additional 135,000 shares of
Common Stock at the public offering price, less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriters may exercise such
option only to satisfy over-allotments in the sale of the shares of Common
Stock.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 2.5% of the total proceeds of this Offering, or
$157,500 (and 2.5% of the total proceeds from the sale of any shares of Common
Stock pursuant to the exercise of the over-allotment option, or $23,625 if the
Underwriters exercise the over-allotment option in full). In addition to the
Underwriters' commissions and the Representative's expense allowance, the
Company is required to pay the costs of qualifying the shares of Common Stock
under Federal and state securities laws, together with legal and accounting
fees, printing and other costs in connection with this Offering.
At the closing of this Offering, the Company will issue to the
Representative, for nominal consideration, the Representative's Warrants to
purchase up to 90,000 shares of Common Stock of the Company. The shares of
Common Stock subject to the Representative's Warrants are identical to the
shares of Common Stock sold to the public, except for the purchase price and
certain registration rights. The Representative's Warrants will be exercisable
for a four-year period commencing one year from the date of this Prospectus, at
an exercise price of $_______ per share of Common Stock (that being 140% of the
initial public offering price per share of Common Stock). The Representative's
Warrants will not be transferable prior to their initial exercise date except to
successors in interest to the Representative and/or one or more officers of the
Representative.
The Representative's Warrants will contain anti-dilution provisions
providing for appropriate adjustment in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transactions. The
Representative's Warrants do not entitle the Representative to any rights as a
stockholder of the Company until such warrants are executed and the shares of
Common Stock are purchased thereunder.
48
The Representative's Warrants and the shares of Common Stock issuable
thereunder may not be offered for sale to the public except in compliance with
the applicable provisions of the Act. The Company has agreed that if it causes a
post-effective amendment to the Registration Statement of which this Prospectus
is a part, or a new registration statement or offering statement under
Regulation A, to be filed with the Securities and Exchange Commission
("Commission"), the Representative shall have the right during the life of the
Representative's Warrants to include therein for registration the
Representative's Warrants and/or the shares of Common Stock issuable upon their
exercise at no expense to the Representative. Additionally, the Company has
agreed that, upon demand by the holder(s) of at least 50% of the (i) total
unexercised Representative's Warrants and (ii) shares of Common Stock issued
upon the exercise of the Representative's Warrants, made on no more than two
separate occasions during the exercise period of the Representative's Warrants,
the Company shall use its best efforts to register the Representative's Warrants
and/or any of the shares of Common Stock issuable upon the exercise thereof,
provided that the Company has available current financial statements, the
initial such registration to be at the Company's expense and the second at the
expense of the holder(s).
For the period during which the Representative's Warrants are exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other stockholders of the Company. The holder(s) of the Representative's
Warrants can be expected to exercise the warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital from an offering
of its unissued Common Stock on terms more favorable to the Company than those
provided for in the Representative's Warrants. Such facts may materially
adversely affect the terms on which the Company can obtain additional financing.
To the extent that the Representative realizes any gain from the resale of the
Representative's Warrants or the shares of Common Stock issuable thereunder,
such gain may be deemed additional underwriting compensation under the Act.
The Company has agreed to enter into a one year consulting agreement with
the Representative, pursuant to which the Representative will act as financial
consultant to the Company, commencing upon the closing date of this Offering.
Under the terms of this agreement, the Representative, to the extent reasonably
required in the conduct of the business of the Company and at the prior written
request of the President of the Company, has agreed to evaluate the Company's
managerial and financial requirements, assist in the preparation of budgets and
business plans, advise with regard to sales planning and sales activities, and
assist in financial arrangements. The Representative will make available
qualified personnel for this purpose. The non-refundable consulting fee of
$60,000 will be payable, in full, on the closing date of this Offering.
The Company has agreed that it will engage a public relations firm
acceptable to the Representative and the Company. The Company also has agreed to
maintain a relationship with such public relations firm for minimum period of
two years and on such other terms as are acceptable to the Representative.
The Company has also agreed that, for a period of two years from the closing
of this Offering, if it participates in any merger, consolidation or other
transaction which the Representative has brought to the Company (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities), which transaction is
consummated within three years of the closing of this Offering, then it will pay
for the Representative's services an amount equal to 5% of the first $1.0
million of value paid or value received in the transaction, 4% of any
consideration above $1.0 million and less than $2.0 million and 3% of any
consideration in excess of $2.0 million and less than $3.0 million, 2% of any
consideration above $3.0 million and less than $4.0 million and 1% of any
consideration exceeding $4.0 million. The Company has also agreed that if,
during this two-year period, someone other than the Representative brings such a
merger, consolidation or other transaction to the Company, and if the Company in
writing retains the Representative for consultation or other services in
connection therewith, then upon consummation of the transaction the Company will
pay to the Representative as a fee the appropriate amount as set forth above or
as otherwise agreed to between the Company and the Representative.
49
The Company has agreed that for a period of one year from the date of this
Prospectus the Company will not sell or otherwise dispose of any securities
without the prior written consent of the Representative, which consent shall not
be unreasonably withheld, with the exception of shares of Common Stock issued
pursuant to the exercise of options, warrants or other convertible securities
outstanding prior to the date of this Prospectus and described herein. The
Company also has agreed that for a period of 18 months from the date of this
Prospectus, the Company will not sell or issue any securities pursuant to
Regulation S under the Securities Act without the Representative's prior written
consent.
The holders of all of the shares of Common Stock outstanding immediately
prior to this Offering and the holders of all options and warrants to purchase
Common Stock outstanding on the date hereof have agreed that for a period of 18
months from the date of this Prospectus they will not offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock acquired prior to this
Offering or purchasable under any option, warrant or convertible debt owned by
them prior to this Offering, without the prior written consent of the
Representative.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. The offering price of the securities being offered hereby was determined
by negotiation between the Company and the Representative. Factors considered in
determining such price include the history of and the prospects for the industry
in which the Company competes, the past and present operations of the Company,
the future prospects of the Company, the ability of the Company's management,
the earnings, net worth and financial condition of the Company, the general
condition of the securities markets at the time of this Offering, and the prices
of similar securities of comparable companies.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Reid & Priest LLP, New York, New York. Certain legal matters in
connection with this Offering will be passed upon for the Representative by
Harter, Secrest & Emery, Rochester, New York.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman, LLP and Ferro, Berdon & Company, L.L.P.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firms as
experts in giving said reports.
CHANGE IN INDEPENDENT AUDITORS
In September 1996, the Company's Board of Directors retained BDO Seidman,
LLP as its independent public accountants and replaced the Company's former
auditors Ferro, Berdon & Company, L.L.P. as its independent public accountants.
During the period Ferro, Berdon & Company, L.L.P. was retained, there were no
disagreements with the former auditors on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure with
respect to the Company's financial statements for the fiscal years ended
December 25, 1993 and December 31, 1994 or up through the time of replacement
which, if not resolved to the former auditors' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. For the past two fiscal years, no accountant's report
prepared by the former auditors contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope, or
accounting principles. Prior to retaining BDO Seidman, LLP, the Company had not
consulted with BDO Seidman, LLP regarding accounting principles.
50
AVAILABLE INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 ("Registration Statement") under the Act, with respect to the shares of
Common Stock offered hereby. This Prospectus, filed as a part of the
Registration Statement, does not contain certain information set forth in or
annexed as exhibits and schedules to the Registration Statement. For further
information regarding the Company and the securities offered hereby, reference
is made to the Registration Statement and to the exhibits and schedules filed as
a part thereof, which may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or copied upon
request to the Public Reference Section of the Commission and payment of the
prescribed fee. The Commission also maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document referred to herein are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
51
GENERAL BEARING CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Certified Public Accountants ........... F-2-F-3
Consolidated Financial Statements:
Balance Sheets ............................................. F-4
Statements of Operations ................................... F-5
Statements of Changes in Stockholders' Equity .............. F-6
Statements of Cash Flows ................................... F-7
Summary of Significant Accounting Policies ................. F-8-F-10
Notes to Consolidated Financial Statements ................. F-11-F-20
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL BEARING CORPORATION
West Nyack, New York
We have audited the accompanying consolidated balance sheet of General
Bearing Corporation and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years ended December 25, 1993 and 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 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 31, 1994, and the results of
their operations and their cash flows for the years ended December 25, 1993 and
December 31, 1994, in conformity with generally accepted accounting principles.
FERRO, BERDON & COMPANY, LLP
New York, New York
March 24, 1995
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL BEARING CORPORATION
West Nyack, New York
We have audited the accompanying consolidated balance sheet of General
Bearing Corporation and subsidiaries as of December 30, 1995, and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the year 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 audit.
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 financial position of General
Bearing Corporation and subsidiaries as of December 30, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
September 13, 1996, except for Note 15(a),
which is as of October 10, 1996
F-3
GENERAL BEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current:
Cash .................................................................... $ 66,953 $ 50,735 $ 8,551
Accounts receivable -- trade, less allowance for
doubtful accounts of $255,000, $255,000 and $294,000 .................. 5,586,661 6,044,042 4,828,985
Inventories ............................................................. 13,662,631 16,626,234 14,985,073
Prepaid expenses and other current assets ............................... 210,141 184,139 149,675
Advances to parent and affiliates ....................................... 413,978 215,350 634,304
----------- ----------- ------------
Total current assets ................................................ 19,940,364 23,120,500 20,606,588
----------- ----------- ------------
Fixed assets, net .......................................................... 2,028,075 2,480,170 2,614,398
----------- ----------- ------------
Investments and advances:
Investments in affiliates ............................................... 1,568,867 687,454 687,454
Advances to affiliate ................................................... 255,824 255,824 255,824
----------- ----------- ------------
1,824,691 943,278 943,278
----------- ----------- ------------
Deferred tax asset ......................................................... -- 500,000 --
----------- ----------- ------------
Other assets ............................................................... 349,436 42,460 234,740
----------- ----------- ------------
Total Assets ............................................................... $24,142,566 $27,086,408 $ 24,399,004
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Note payable -- bank .................................................... $ 9,970,109 $10,862,894 $ 10,298,432
Accounts payable:
Trade ............................................................... 2,615,446 4,811,677 2,124,418
Affiliates .......................................................... 724,859 1,398,525 2,110,938
Accrued expenses and other current liabilities .......................... 1,944,074 1,467,563 1,648,477
Accrued customer damage claims .......................................... -- 1,564,742 461,230
Current maturities of long-term debt .................................... -- 222,840 222,840
----------- ----------- ------------
Total current liabilities ............................................. 15,254,488 20,328,241 16,866,335
----------- ----------- ------------
Long-term debt, less current maturities:
Bank .................................................................... -- 1,225,740 1,058,610
Parent .................................................................. 4,460,142 2,875,142 2,875,142
Affiliates .............................................................. 758,173 716,422 733,750
----------- ----------- ------------
Total long-term liabilities ........................................... 5,218,315 4,817,304 4,667,502
----------- ----------- ------------
Commitments and contingencies
Stockholders' 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 30,000
Additional paid-in capital .............................................. 23,654,524 23,654,524 23,654,524
----------- ----------- ------------
Deficit ................................................................. (20,014,761) (21,743,661) (20,819,357)
----------- ----------- ------------
Total stockholders' equity ............................................ 3,669,763 1,940,863 2,865,167
----------- ----------- ------------
Total Liabilities and Stockholders' Equity ................................. $24,142,566 $27,086,408 $ 24,399,004
=========== =========== ============
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
</TABLE>
F-4
GENERAL BEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales ......................................... $27,253,855 $37,031,669 $42,070,000 $31,962,550 $29,800,338
Cost of sales ................................. 20,724,474 28,483,348 32,068,789 24,145,538 21,939,282
----------- ----------- ----------- ----------- -----------
Gross profit ............................... 6,529,381 8,548,321 10,001,211 7,817,012 7,861,056
Selling, general and administrative expenses .. 6,916,056 7,674,250 7,495,208 5,547,965 5,568,398
Provision(recovery) -- customer damage claims . -- -- 2,152,000 2,152,000 (100,959)
----------- ----------- ----------- ----------- -----------
Operating income (loss) .................... (386,675) 874,071 354,003 117,047 2,393,617
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest-net, including $-0-, $210,000,
$180,000, $142,500 and $46,972 to parent . 512,965 989,912 1,428,451 1,036,461 969,313
Equity in (income) loss of affiliate ....... 182,802 (403,071) (78,587) (54,571) --
Other ...................................... (717,355) 32,268 1,233,039 1,118,261 --
----------- ----------- ----------- ----------- -----------
(21,588) 619,109 2,582,903 2,100,151 969,313
----------- ----------- ----------- ----------- -----------
Income (loss) before income tax (benefit) and
extraordinary item .......................... (365,087) 254,962 (2,228,900) (1,983,104) 1,424,304
Income tax (benefit) .......................... -- -- (500,000) -- 500,000
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item ....... (365,087) 254,962 (1,728,900) (1,983,104) 924,304
Extraordinary item -- settlement of debts at a
discount .................................... 4,384,365 108,275 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ 4,019,278 $ 363,237 $(1,728,900) $(1,983,104) $ 924,304
=========== =========== =========== =========== ===========
Income (loss) per common share:
Income (loss) before extraordinary item .... $ (.02) $ .08 $ (.58) $ (.66) $ .31
Extraordinary item ......................... .19 .04 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ .17 $ .12 $ (.58) $ (.66) $ .31
=========== =========== =========== =========== ===========
Weighted average number of common shares ...... 23,125,000 3,000,000 3,000,000 3,000,000 3,000,000
=========== =========== =========== =========== ===========
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
</TABLE>
F-5
GENERAL BEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
10.5% CUMULATIVE, 5% CUMULATIVE,
SERIES B PREFERRED SERIES A PREFERRED
STOCK, PAR VALUE STOCK, PAR VALUE
$.01 PER SHARE $894.50 PER SHARE PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------- ----------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------- --------- -------- --------- ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 26, 1992 .. 1,000 $3,000,000 10,000 $ 8,945,000 -- $ -- 24,000,000 $ 240,000 $ (44,650)
Cancellation of
outstanding shares
pursuant to Chapter XI
reorganization ............ (1,000) (3,000,000) (10,000) (8,945,000) -- -- (24,000,000) (240,000) 12,177,800
Shares issued to World
Machinery Company
pursuant to Chapter XI
reorganization ............ -- -- -- -- -- -- 3,000,000 30,000 (29,900)
Settlement of debt at a
discount .................. -- -- -- -- -- -- -- -- 11,451,274
Contributed capital ......... -- -- -- -- -- -- -- -- 100,000
Net income .................. -- -- -- -- -- -- -- -- --
------ --------- -------- -------- -------- -------- ---------- --------- -----------
Balance, December 25, 1993 .. -- -- -- -- -- -- 3,000,000 30,000 23,654,524
Net income .................. -- -- -- -- -- -- -- --
------ --------- -------- -------- -------- -------- ---------- --------- -----------
Balance, December 31, 1994 .. -- -- -- -- -- -- 3,000,000 30,000 23,654,524
Net loss .................... -- -- -- -- -- -- -- -- --
------ --------- -------- -------- -------- -------- ---------- --------- -----------
Balance, December 30, 1995 .. -- -- -- -- -- -- 3,000,000 30,000 23,654,524
Net income (unaudited) ...... -- -- -- -- -- -- -- -- --
------ --------- -------- -------- -------- -------- ---------- --------- -----------
Balance, September 28, 1996
(unaudited) ............... -- $ -- -- $ -- -- $ -- 3,000,000 $ 30,000 $23,654,524
====== ========= ======== ========= ======== ======== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
-------------
<S> <C>
Balance, December 26, 1992 .......... $ (24,397,276)
Cancellation of
outstanding shares
pursuant to Chapter XI
reorganization .................... --
Shares issued to World
Machinery Company
pursuant to Chapter XI
reorganization .................... --
Settlement of debt at a
discount .......................... --
Contributed capital ................. --
Net income .......................... 4,019,278
---------
Balance, December 25, 1993 .......... (20,377,998)
Net income .......................... 363,237
---------
Balance, December 31, 1994 .......... (20,014,761)
Net loss ............................ (1,728,900)
---------
\Balance, December 30, 1995 .......... (21,743,661)
Net income (unaudited) .............. 924,304
---------
Balance, September 28, 1996
(unaudited) ....................... $ (20,819,357)
=============
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
</TABLE>
F-6
GENERAL BEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------- -----------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................... $ 4,019,278 $ 363,237 $(1,728,900) $(1,983,104) $ 924,304
Add (deduct) noncash items charged (credited)
to income:
Extraordinary income .................... (4,384,365) (108,275) -- -- --
Deferred income taxes ................... -- -- (500,000) -- 500,000
Depreciation and amortization ........... 540,253 505,447 520,082 302,097 414,203
Equity in (income) loss of affiliate .... 182,802 (403,071) (78,587) (54,571) --
Revaluation of equity investment ........ -- -- 960,000 960,000 --
Revaluation of goodwill ................. -- -- 93,333 93,333 --
(Gain) loss on disposal of equipment and
improvements ........................... -- (24,073) 144,967
Other ................................... (38,172) (9,787) 64,928 64,928 --
Add (deduct) changes in operating assets
and liabilities:
Accounts receivable .................. (517,949) (1,345,403) (457,381) 314,658 1,215,057
Inventories .......................... (523,371) (4,757,159) (2,963,603) (1,541,923) 1,641,161
Prepaid expenses and other assets .... 13,845 (183,484) 169,234 221,936 (160,387)
Due to (from) affiliates ............. (17,693) (399,601) 617,296 (41,935) 828,869
Accounts payable and accrued
expenses ............................ 930,688 1,665,002 1,788,263 1,128,547 (2,506,345)
Accrued customer damage claims ....... -- -- 1,564,742 1,824,547 (1,103,512)
------------ ------------ ------------ ------------- -------------
Net cash provided by (used in)
operating activities ............ 205,316 (4,697,167) 194,374 1,288,513 1,753,350
------------ ------------ ------------ ------------- -------------
Cash flows from investing activities:
Equipment purchases ......................... (156,412) (253,892) (1,111,653) (940,831) (545,860)
Sale of machinery ........................... -- 86,000 -- -- --
Net cash from acquisition ................... 291,846 -- -- -- --
------------ ------------ ------------ ------------- -------------
Net cash provided by (used in)
investing activities ............ 135,434 (167,892) (1,111,653) (940,831) (545,860)
------------ ------------ ------------ ------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt ................ -- -- 1,560,000 1,560,000 --
Repayment of long-term debt ................. (562,210) -- (111,420) (55,710) (167,130)
Increase (decrease) in note payable -- bank . -- 4,158,002 892,785 (634,601) (564,462)
Proceeds from long-term debt and other
balances -- parent ........................ 500,000 500,000 -- -- --
Repayment of long-term debt and other
balances -- parent ........................ -- (50,918) (1,440,304) (1,278,258) (518,082)
------------ ------------ ------------ ------------- -------------
Net cash provided by (used in)
financing activities ............ (62,210) 4,607,084 901,061 (408,569) (1,249,674)
------------ ------------ ------------ ------------- -------------
Net increase (decrease) in cash ................ 278,540 (257,975) (16,218) (60,887) (42,184)
Cash, beginning of period ...................... 46,388 324,928 66,953 66,953 50,735
------------ ------------ ------------ ------------- -------------
Cash, end of period ............................ $ 324,928 $ 66,953 $ 50,735 $ 6,066 $ 8,551
============ ============ ============ ============= =============
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
</TABLE>
F-7
GENERAL BEARING CORPORATION AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
THE COMPANY
General Bearing Corporation ("Company" or "General") 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 and the industrial
aftermarket principally in the United States 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 is
a wholly-owned subsidiary of World Machinery Company ("World" or "Parent").
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements 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 improvements ................ Lesser of life of lease or useful life
Expenditures for maintenance, repairs and minor renewals or betterments are
charged against income. Major renewals and replacements are capitalized.
REVENUE RECOGNITION
The Company recognizes revenue when products are 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 periods ended 1993 and
1995 and 53 weeks in the period ended 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.
F-8
GENERAL BEARING CORPORATION AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
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 VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
About Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, for which it is practicable to estimate
the value, whether or not recognized on the balance sheet.
The fair values 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 the
repayment terms are subject to management's discretion. Effective December 31,
1995, the balances bear interest at 8% which is accrued monthly.
CONCENTRATIONS OF CREDIT RISK
The Company extends credit based on an evaluation of 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 10).
RECENT ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for
all arrangements under which employees receive shares of stock or other equity
instruments
F-9
GENERAL BEARING CORPORATION AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
of the employer or the employer incurs liabilities to employees in amounts based
on the price of its stock. The Company does not anticipate adopting the fair
value method encouraged by SFAS No. 123 and will account for such transactions
in accordance with APB No. 25.
EARNINGS PER COMMON SHARE
Earnings per common share are computed on the basis of the weighted average
number of common shares outstanding during the year.
Supplementally earnings (loss) per share for the year ended December 30,
1995 and the nine months ended September 28, 1996 was ($.46) and $.33,
respectively. These calculations reflect the number of shares that will be
issued in connection with the proposed initial public offering for the purpose
of paying down $2,100,000 of the Revolving Credit Facility.
DEFERRED REGISTRATION COSTS
Costs in connection with the proposed public offering have been deferred and
are included in other assets. These costs will be offset against the proceeds of
a successful offering, or expensed if the proposed offering is not consummated.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 28, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 28, 1996.
F-10
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Finished goods .......................................... $ 8,597,545 $11,134,414 $ 8,938,913
Raw materials, purchased parts and work-in-process ...... 5,065,086 5,491,820 6,046,160
------------ ------------ -------------
$13,662,631 $16,626,234 $ 14,985,073
============ =========== =============
</TABLE>
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Machinery and equipment ................................. $ 5,185,392 $6,071,074 $ 6,400,526
Furniture and fixtures .................................. 601,303 608,468 808,459
Leasehold improvements .................................. 821,318 389,729 431,207
Transportation equipment ................................ 119,088 88,893 63,832
------------ ------------ -------------
6,727,101 7,158,164 7,704,024
Less: Accumulated depreciation and amortization ......... 4,699,026 4,677,994 5,089,626
------------ ------------ -------------
$ 2,028,075 $2,480,170 $ 2,614,398
============ =========== =============
</TABLE>
Depreciation and amortization expense was $540,253, $505,447 and $518,368
for the years 1993, 1994 and 1995, respectively. Depreciation and amortization
expenses for the nine months ended 1995 and 1996 were $302,097 and $411,632,
respectively.
The Company purchased, through an affiliate, $750,000 of machinery and
equipment in 1995 which has not been placed into service.
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Security deposits and other ............................. $ 111,103 $ 20,174 $ 15,025
Deferred loan costs ..................................... -- 22,286 19,715
Miscellaneous receivables ............................... 145,000 -- --
Deferred charges relating to the offering ............... -- -- 200,000
Goodwill, net of accumulated amortization
of $6,667 (Note 10) .................................. 93,333 -- --
------------ ------------ -------------
$ 349,436 $ 42,460 $234,740
============ =========== =============
</TABLE>
F-11
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
4. INVESTMENTS AND ADVANCES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Investments in affiliates:
50%-owned, at equity -- Alurop Trading Corp., a Panamanian
holding company whose principal asset is 100% of the capital
stock of WMW Machinery of New Jersey, Inc.(a)(b) ........... $ 977,479 $ -- $ --
Less than 50%-owned at equity:
Shanghai General Bearing Company Ltd. (25%-owned)
and Wafangdian Hyatt Bearing Manufacturing Co.
Ltd. (25%-owned)(c) ....................................... 591,388 687,454 687,454
------------ ------------ -------------
$1,568,867 $ 687,454 $ 687,454
============ ============ =============
Advances to Parent and affiliates:
Current:
Parent(d) ................................................. $ 260,918 $ 116,222 $ 634,304
Shar General Corp.(e) ..................................... 97,795 57,094 --
All others ................................................ 55,265 42,034 --
------------ ------------ -------------
$ 413,978 $ 215,350 $ 634,304
============ ============ =============
Long-term:
General IKL Corp. (see Note 11(e)) ........................ $ 255,824 $ 255,824 $ 255,824
============ ============ =============
</TABLE>
____________________
(a) Condensed financial data of WMW Machinery of New Jersey, Inc. ("WMW")
is as follows:
BALANCE SHEET
DECEMBER 31, 1994
-----------------
Assets
Current assets ................................. $ 121,000
Other assets ................................... 523,000
Investment in redeemable
preferred stock -- affiliate ................. 12,049,000
--------------
$ 12,693,000
==============
Liabilities
Accounts payable ............................... $ 9,121,000
Other current liabilities ...................... 845,000
Notes and other payables -- affiliates ......... 772,000
--------------
$ 10,738,000
==============
Stockholders' equity ........................... $ 1,955,000
==============
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
----------------------------
Net sales ...................................... $ 146,000
Operating loss ................................. (57,000)
Net income ..................................... 578,000
(b) On January 27, 1988, the Company invested $15,000 in Alurop Trading Corp.
The Company was obligated to advance working capital to fund operating
expenses, including payroll, advertising, administration and sales costs of
the joint venture as required.
F-12
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
4. INVESTMENTS AND ADVANCES -- (CONTINUED)
During 1995, the Company revalued its equity investment in Alurop Trading
Corp. to properly reflect its 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 12(d)), the limited
operations of WMW (Alurop's only asset) and the uncertain value of WMW's
investment in preferred stock. (Note 10).
(c) At December 30, 1995, 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 31, DECEMBER 30,
1994 1995
----------- ------------
Current assets ..................... $2,663,000 $ 2,585,000
Total assets ....................... 6,512,000 6,293,000
Current liabilities ................ 3,318,000 3,319,000
Total liabilities .................. 3,318,000 3,336,000
Stockholders' equity ............... 3,194,000 2,957,000
YEAR ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30,
1993 1994 1995
------------- ------------- -------------
Net sales ............... $2,947,000 $5,875,000 $7,321,000
Gross profit ............ 59,000 1,352,000 1,586,000
Operating income ........ 261,000 521,000 438,000
Net income .............. 260,000 456,000 384,000
At December 30, 1995, 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 material
respects to those of SGBC.
(d) Includes accrued interest payable to the Parent of $150,000, $300,000 and
$412,500 as of December 31, 1994, December 30, 1995 and September 28, 1996,
respectively, relating to the subordinated note (Note 7).
(e) The Company made advances on behalf of World's 50% owned joint venture
affiliate. The amounts due do not bear interest.
5. NOTE PAYABLE -- BANK
The Company is obligated to a bank under a revolving line of credit which
expires on July 1, 1998 and a term loan (see Note 7). 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.
F-13
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
5. NOTE PAYABLE -- BANK -- (CONTINUED)
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%, or 10.25% at September 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. At December 30, 1995, the Company was in violation of
certain loan covenants; however, the bank agreed to waive those violations and
amended the covenants going forward.
Commitments under letters of credit amounted to approximately $470,000 at
September 28, 1996.
6. TAXES ON INCOME
Provisions for Federal, state and local income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------- -----------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Deferred (benefit):
Federal ................... $ -- $ -- $ (473,000) $ -- $ 473,000
State and local ........... -- -- (27,000) -- 27,000
------------ ------------ ------------ ------------- -------------
$ -- $ -- $ (500,000) $ -- $ 500,000
============ ============ ============ ============= ============
</TABLE>
The major elements contributing to the difference between the Federal
statutory rate and the Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------- -----------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)% (34.0)% 34.0%
Increase (decrease) in
valuation allowance (due
primarily to non-utilization
of net operating loss) (35.8) (41.8) 9.1 33.0 (1.3)
Permanent differences 1.8 7.8 (1.0) 1.0 2.4
----- ----- ----- ----- -----
-- % -- % (25.9)% -- % 35.1%
===== ===== ===== ===== =====
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Gross deferred tax assets:
Accounts receivable allowances $ 90,000 $ 90,000 $ 88,000
Net operating loss carryforwards 4,230,000 4,693,000 4,282,000
Other 189,000 336,000 104,000
----------- ----------- ------------
4,509,000 5,119,000 4,474,000
Gross deferred tax liabilities:
Plant and equipment, depreciation differences (514,000) (351,000) (280,000)
----------- ----------- ------------
3,995,000 4,768,000 4,194,000
Valuation allowance (3,995,000) (4,268,000) (4,194,000)
----------- ----------- ------------
$ -- $ 500,000 $ --
=========== =========== ============
</TABLE>
F-14
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
6. TAXES ON INCOME -- (CONTINUED)
Management believes that the remaining portion of the deferred tax (benefit)
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 30, 1995, the Company has Federal tax loss carryovers of
approximately $13.2 million expiring at various dates through the year 2010.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Bank:
$1,560,000 three year loan from the same bank referred to in
Note 5. Interest is calculated at the bank's prime rate
plus 2%; 10.25% at September 28, 1996; principal of
$18,570 plus inter- est is payable monthly, through June
1, 1998 with final payment of $910,050 due July 1, 1998... $ -- $1,448,580 $ 1,281,450
Less: Current maturities ................................... -- 222,840 222,840
------------ ------------ -------------
-- 1,225,740 1,058,610
------------ ------------ -------------
Parent:
6%subordinated promissory note due December 1998. Interest
is accruable but is to be paid annually only out of net
income in excess of $400,000. The note is subordinated to
the rights of all creditors and are secured by machinery
and equipment having a net book value of approximately
$1,400,000 at December 30, 1995........................... 2,500,000 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 defer- red until, and paid
in, 1995. Repayment is subject to management discretion... 750,142 375,142 375,142
6%loan payable due December 1995, inter- est payable
quarterly ................................................ 1,000,000 -- --
Accrued interest ........................................... 210,000 -- --
------------ ------------ -------------
4,460,142 2,875,142 2,875,142
------------ ------------ -------------
Affiliates:
General-IKL Corp. (see Note 11(e)) ......................... 758,173 716,422 733,750
------------ ------------ -------------
$ 5,218,315 $4,817,304 $ 4,667,502
============ ============ =============
</TABLE>
At December 30, 1995, aggregate principal payments for the long-term bank
debt agreements are $222,840 in 1996, $222,840 in 1997 and $1,000,900 in 1998.
The repayment terms of the long-term debt parent and affiliates are stated above
or are at the discretion of management.
F-15
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
8. DISCRETIONARY PROFIT SHARING PLAN
The Company and certain of its affiliates maintain profit sharing plans
covering eligible salaried and nonunion employees. Contributions are made to the
plans at the discretion of the management of the companies. The Company made
contributions of $30,000 and $60,000 for 1993 and 1994. There were no
contributions recorded in 1995. For the nine months ended 1996, the Company
recorded accrued contributions of $30,000.
9. PROVISION FOR CUSTOMER DAMAGE CLAIMS
In 1995, the Company was notified that certain wheel bearings supplied to
the railroad industry did not meet specifications. As a result, 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.
10. OTHER (INCOME) EXPENSE
Other (income) expense consists of:
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revaluation of equity investment
(Note 4 (b)) ....................... $ -- $ -- $ 960,000 $ 960,000 $ --
Revaluation of goodwill (Note 3) ..... -- -- 93,333 93,333 --
Interest income ...................... (436,244) -- -- -- --
Litigation settlement ................ (235,013) -- -- -- --
Other ................................ (46,098) (32,268) 179,706 64,928 --
------------ ------------ ------------ ------------- -------------
$ (717,355) $ (32,268) $ 1,233,039 $ 1,118,261 $ --
============ ============ ============ ============= =============
</TABLE>
The Company incurred interest expense of $512,965, 989,912 and $1,428,451 in
1993, 1994 and 1995, respectively. For the nine months ended 1995 and 1996, the
Company incurred interest expense of $1,036,461 and $1,034,841, respectively.
11. TRANSACTIONS WITH AFFILIATES
(a) The Company made purchases of approximately $5.3 million, $6.9 million
and $9.1 million from affiliates in 1993, 1994 and 1995, respectively. For the
nine months ended 1995 and 1996, the Company made purchases of approximately
$6.7 million and $6.4 million, respectively. Accounts payable -- affiliates
relate primarily to these purchases.
(b) General shares office facilities and provides services for several
affiliates. General charged these affiliates $108,000, $115,000 and $120,000 in
1993, 1994 and 1995, respectively. General charged these affiliates $90,000 for
each of the nine months ended 1995 and 1996.
(c) General leases property, including its corporate headquarters, from
Gussack Realty Company ("Realty"), which is owned by shareholders of World. Rent
and real estate taxes paid to Realty were approximately $786,000, $923,000 and
$861,000 in 1993, 1994 and 1995, respectively (see Note 12). For the nine months
ended 1995 and 1996, the Company paid rent and real estate taxes of
approximately $786,000 and $725,000 respectively (Note 15(c)).
F-16
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
11. TRANSACTIONS WITH AFFILIATES -- (CONTINUED)
(d) 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 $84,000, $1,708,000 and
$1,742,000 for the fiscal years ended 1993, 1994 and 1995, respectively. For the
nine months ended 1995 and 1996, such payments amounted to approximately
$1,262,000 and $1,204,000, 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. The Company believes that it will have the right to offset amounts due
from General-IKL Corp. against amounts due to General-IKL Corp., when the
restrictions are removed.
12. COMMITMENTS AND CONTINGENCIES
(a) Effective January 1996, the Company completed a move to new facilities
owned by Realty. Existing obligations under a long-term lease for the previous
facilities, also owned by Realty, were waived. The facilities are currently
leased on a month-to-month basis.
Rent expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------ ------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Gross rent paid (excluding taxes) ....... $ 596,016 $ 756,555 $ 748,320 $ 556,965 $ 556,965
Less: Reimbursed from related
companies ............................. (108,000) (123,791) (224,820) (168,615) (19,500)
------------ ------------ ------------ ------------- -------------
$ 488,016 $ 632,764 $ 523,500 $ 388,350 $ 537,465
============ ============ ============ ============= =============
</TABLE>
(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 $238,000, $204,000 and
$204,000 in 1993, 1994 and 1995, respectively. Rent expense for each of the
nine-month periods ended 1995 and 1996 was $153,000 and $162,000, respectively.
Minimum annual rentals as of December 30, 1995, under this lease, are as
follows:
YEAR AMOUNT
---- ------
1996 .................................. $ 216,000
1997 .................................. 219,500
1998 .................................. 239,500
1999 .................................. 105,000
---------
$ 780,000
=========
(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 30, 1995, future payments required under the
agreement total $157,500.
F-17
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
(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 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.
The Company is subject to other proceedings and claims in the normal course
of business. Management presently believes that the disposition of all such
known proceedings and claims, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position, operations or
liquidity.
(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.
13. SUPPLEMENTAL CASH FLOW INFORMATION
For the periods ended December 25, 1993, December 31, 1994 and December 30,
1995, the Company paid interest of approximately $518,000, $745,000, and
$1,257,000, respectively. For the nine months ended 1995 and 1996, the Company
paid interest of approximately $1,031,000 and $1,043,000, respectively. In
December 1993, the Company settled a debt with its Parent resulting in a
non-cash contribution to capital of $11,451,274.
14. DISCHARGE FROM CHAPTER XI -- PLAN OF REORGANIZATION
In December 1993, General successfully emerged from a Chapter XI bankruptcy
proceeding which commenced in September 1991. Prior to the reorganization the
Company's common stock was owned 75% by Faiga Tuba Corporation, 18.75% by Harold
Geneen and 6.25% by Robert Duncan. The Series A Preferred Stock was owned 100%
by Faiga Tuba Corporation. Faiga Tuba Corporation was owned 100% by Seymour
Gussack, his wife and children. World Machinery Company immediately subsequent
to the reorganization was owned approximately 80% by Seymour Gussack, his wife
and children and 20% by Harold Geneen. In connection with the plan of
reorganization, the following significant transactions occurred:
(a) 100% of the common stock of General was acquired by World (see (b)
below). (The shareholders of World, while not identical, were similar to the
former owners of General).
(b) General was obligated to World for $14,701,416 (the "Obligation")
resulting from World's purchase for $2,000,000 of a General obligation from the
Wells Fargo Bank. The Obligation was satisfied by the issuance of a 6% secured
promissory note in the amount of $2,500,000, a $750,142 unsecured promissory
note and the issuance of 1,000 shares of Common Stock (3,000,000 as adjusted for
a 3000-for-one stock split as of October 10, 1996). The difference between the
face value of the Obligation and the settled amounts ($11,451,274) has been
recorded as a contribution to capital. The original obligation of General to the
Wells Fargo Bank was a $12,000,000 six year term loan bearing interest at 13%
per annum. The term loan was payable in three equal annual installments from
October 1992 to October 1994 and was secured by the property, plant, equipment
and intangible assets of General.
F-18
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
14. DISCHARGE FROM CHAPTER XI -- PLAN OF REORGANIZATION -- (CONTINUED)
(c) To assist General with its plan of reorganization, World agreed to make
advances of up to $1,200,000; $500,000 was advanced on December 25, 1993 and
$500,000 was advanced in January 1994 (see Note 7).
(d) Unsecured creditors were offered a cash settlement equal to 5% of their
outstanding pre-petition claims or in the alternative, 10% of such claims
payable 2% per year for five years. Substantially all of the creditors opted for
the cash settlement; the discount applicable to the five year settlements were
immaterial.
(e) The holders of the Company's redeemable Series B preferred stock, its
Series A preferred stock and its common stock received no consideration.
(f) The Company entered into a financing agreement with the Bank of New York
Commercial Corporation ("BNYCC") replacing its existing arrangement with BNYCC.
In connection with the plan of reorganization, the Company settled its
pre-petition obligations at a discount. A summary of the income arising from
this settlement follows:
Reduction in obligations owing to:
Unsecured creditors and reversals of accruals .......... 3,974,380
Affiliates and shareholders ............................ 409,985
----------
$4,384,365
==========
15. SUBSEQUENT EVENTS
(a) In connection with a proposed initial public offering of its common
stock, the 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 effected a 3,000-for-one stock split. Additionally, the amendment authorizes
1,000,000 shares of preferred stock $.01 par value per share. The Board of
Directors is authorized to fix the rights, preferences, privileges and
restrictions of any series of preferred stock, including the dividend rights,
original issue price, conversion rights, voting rights, terms of redemption,
liquidation preferences and sinking fund terms thereof, and the number of shares
constituting any such series and the designation thereof and to increase or
decrease the number of shares of such series subsequent to the issuance of
shares of such series (but not below the number of shares of such series then
outstanding). All shares and per share data in the consolidated financial
statements have been adjusted to give retroactive effect to the stock split.
(b) Upon the successful completion of this Offering, the Company will adopt
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. Subject to the completion of the proposed offering, 257,500 options at
the offering price will be granted.
F-19
GENERAL BEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Information Related to the Nine Months Ended September 30, 1995
and September 28, 1996 is Unaudited)
15. SUBSEQUENT EVENTS -- (CONTINUED)
The exercise 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.
(c) In November, 1996, the Company entered into a seven year lease expiring
on October 31, 2003, with Realty, which provides for minimum annual lease
payments of $912,840 plus rent increases beginning in 1998 of at least 106% of
the next preceding year's rent. Additionally, the Company signed sublease
agreements with World and an affiliate of World, to sublease a portion of the
Company's space. The subleases run concurrent with the lease noted above and
provide for aggregate minimum annual rents of $170,220 plus rent increases
beginning in 1998 of at least 106% of the next preceding year's rent.
F-20
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
__________________________
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ..................................................... 3
The Company ............................................................ 3
Risk Factors ........................................................... 7
Company History ........................................................ 16
Dilution ............................................................... 18
Use of Proceeds ........................................................ 20
Dividend Policy ........................................................ 20
Capitalization ......................................................... 21
Selected Financial Data ................................................ 22
Management's Discussion and Analysis of
Results of Operations and Financial
Condition ............................................................ 24
Business ............................................................... 29
Management ............................................................. 37
Certain Relationships and Related
Transactions ......................................................... 41
Principal Stockholder .................................................. 44
Description of Securities .............................................. 45
Shares of Common Stock Eligible for
Future Sale .......................................................... 47
Underwriting ........................................................... 48
Legal Matters .......................................................... 50
Experts ................................................................ 50
Change in Independent Auditors ......................................... 50
Available Information .................................................. 51
Index to Financial Statements .......................................... F-1
================================================================================
900,000 SHARES
[LOGO]
GENERAL BEARING
CORPORATION
COMMON STOCK
__________
PROSPECTUS
__________
H.J. MEYERS & CO., INC.
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with this Offering described in this Registration Statement. All
amounts are estimated except the Registration Fee.
Registration fee ............................. $ 4,222.00
NASD filing fee .............................. 1,893.00
Nasdaq listing fee ........................... 7,000.00
Underwriters' nonaccountable
expense allowance ......................... 157,500.00
Accounting fees and expenses ................. 180,000.00*
Legal fees and expenses ...................... 175,000.00*
Blue Sky fees and expenses ................... 25,000.00
Transfer agent fee ........................... 3,000.00*
Printing and engraving ....................... 75,000.00*
Miscellaneous ................................ 4,885.00*
-------------
Total ...................................... $ 633,500.00*
=============
* Estimated
___________
All of the above expenses of this Offering will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ARTICLE IX OF THE COI PROVIDES THAT:
"The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or complete action,
suit or proceeding, whether civil, criminal, administrative or investigative, or
by or in the right of the corporation to procure judgment in its favor, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this section. The indemnification provided by this
section shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under this Certificate of Incorporation or any
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
II-1
ARTICLE X OF THE COMPANY'S BY-LAWS PROVIDES THAT:
"Any person made or threatened to be made a party to or involved in any
action, suit or proceeding, whether civil or criminal, administrative or
investigative (hereinafter, "proceeding") by reason of the fact that he, his
testator or intestate, is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended (but in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) against all expense, loss
and liability (including, without limitation, judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees), actually and
necessarily incurred or suffered by him in connection with the defense of or as
a result of such proceeding, or in connection with any appeal therein. The
Corporation shall have the power to purchase and maintain insurance for the
indemnification of such directors, officers and employees to the full extent
permitted under the laws of the State of Delaware from time to time in effect.
Such right of indemnification shall not be deemed exclusive of any other rights
of indemnification to which such director, officer or employee may be entitled.
The right to indemnification conferred in this By-Law shall be a contract
right and shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
services were or are rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this By-Law or
otherwise."
STATUTORY:
Generally, DGCL Section 145 authorizes Delaware corporations, under certain
circumstances, to indemnify their officers and directors against all expenses
and liabilities (including attorneys' fees) incurred by them as a result of any
suit brought against them in their capacity as a director or an officer, if they
acted in good faith and in manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. A director or officer may also be indemnified against
expenses incurred in connection with a suit by or in the right of the
corporation if such director or officer acted in good faith and in a manner
reasonably believed by him to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made without court approval
if such person was adjudged liable to the corporation.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1993, the Company emerged from a bankruptcy reorganization which
commenced in September 1991. In connection with its Plan of Reorganization, the
Company issued to World: (i) a 6% Secured Promissory Note due 1998 in the
original principal amount of $2.5 million (the "Secured Note"); (ii) a
non-interest bearing, Unsecured Promissory Note in the principal amount of
$750,142 payable in annual installments of $125,000 commencing December 1993
(the "Installment Note"); and (iii) 1,000 shares of Common Stock. The Secured
Note, the Installment Note and the shares of Common
II-2
Stock were issued in exchange for a note in the original principal amount of
$12.0 million, together with accrued interest thereon in the amount of
$2,701,416 that World had acquired from Wells Fargo Bank, N.A., one of the
Company's lenders. The Secured Note, Installment Note and Common Stock were
issued in a transaction exempt from registration under the Act pursuant to
Section 1145 of Chapter 11 of the United States Bankruptcy Code (11 U.S. Code S.
1145). In connection with the issuance of such securities, no commissions or
fees were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Second Restated Certificate of Incorporation*
3.2 -- By-Laws of the Company*
4.1 -- Specimen Stock Certificate*
5 -- Opinion of Reid & Priest LLP*
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 premises*
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*
16.1 -- Letter re: Change in Certifying Accountant*
16.2 -- Letter re: Change in Certifying Accountant (updated)*
21 -- List of Subsidiaries of the Company*
23.1 -- Consent of Ferro, Berdon & Company, L.L.P. (updated)
23.2 -- Consent of BDO Seidman, LLP (updated)
23.3 -- Consent of Reid & Priest LLP (contained in Exhibit 5 hereto)*
24 -- Powers of Attorney*
27 -- Financial Data Schedule*
99.1 -- Consent of Harold S. Geneen pursuant to Rule 438 of the Act*
99.2 -- Consent of Nina M. Gussack pursuant to Rule 438 of the Act*
99.3 -- Consent of Robert E. Baruc pursuant to Rule 438 of the Act*
</TABLE>
___________________
* Previously filed.
II-3
(b) Financial Statement Schedules:
Reports of Independent Certified Public Accountants
Schedule II -- Valuations and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) to provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriter to permit prompt deliver to
each purchaser.
(c) Insofar as indemnification for liability arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(i) For determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and this Offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE HAMLET OF
WEST NYACK, STATE OF NEW YORK, ON THIS 6TH DAY OF FEBRUARY 1997.
GENERAL BEARING CORPORATION
By: /s/ DAVID L. GUSSACK
------------------------------
DAVID L. GUSSACK, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ SEYMOUR I. GUSSACK Chairman of the Board of February 6, 1997
---------------------- Directors
SEYMOUR I. GUSSACK
/s/ DAVID L. GUSSACK President and Director February 6, 1997
---------------------- (Principal Executive
DAVID L. GUSSACK Officer)
/s/ CHRISTOPHER MOORE Vice President Finance February 6, 1997
---------------------- (Principal Financial and
CHRISTOPHER MOORE Accounting Officer)
/s/ JEROME JOHNSON* Director February 6, 1997
----------------------
JEROME JOHNSON
*By: /s/ DAVID L. GUSSACK February 6, 1997
----------------------
DAVID L. GUSSACK
ATTORNEY-IN-FACT
</TABLE>
II-5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL BEARING CORPORATION
West Nyack, New York
The audit referred to in our report dated March 24, 1995 relating to the
consolidated financial statements of General Bearing Corporation and
Subsidiaries, which is contained in the Prospectus, included the audit of the
financial statement schedule listed in the accompanying index for the years
ended December 25, 1993 and December 24, 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 audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
FERRO, BERDON & COMPANY, L.L.P.
New York, New York
March 24, 1995
S-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL BEARING CORPORATION
West Nyack, New York
The audit referred to in our report dated September 13, 1996, except for
Note 15(a) which is as of October 10, 1996 relating to the consolidated
financial statements of General Bearing Corporation and subsidiaries, which is
contained in the Prospectus, included the audit of the financial statement
schedule listed in the accompanying index for the year ended December 30, 1995.
This financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
September 13, 1996
S-2
(B) SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- ------------ ---------- ------------- -------------
ADD
----------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
----------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 25, 1993
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 250,000 $ 5,119 $ 119 $ 255,000
------------ ---------- ------------- -------------
$ 250,000 $ 5,119 $ 119 $ 255,000
============ ========== ============= =============
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
============ ========== ============= =============
</TABLE>
__________________
(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF NET OF RECOVERIES.
S-3
UNDERWRITING AGREEMENT
Dated: [EFFECTIVE DATE]
H.J. MEYERS & CO., INC.
AS REPRESENTATIVE OF THE
UNDERWRITERS NAMED IN
SCHEDULE I HERETO
1895 Mt. Hope Avenue
Rochester, New York 14620
Ladies and Gentlemen:
GENERAL BEARING CORPORATION, a Delaware corporation (the "Company"),
proposes to issue and sell to the one or more Underwriters named in Schedule I
hereto (the "Underwriters"), including H.J. Meyers & Co., Inc. (the
"Representative" or "you"), the Representative of the several Underwriters,
pursuant to this Underwriting Agreement (this "Agreement"), 900,000 shares of
the Common Stock, $.01 par value, of the Company (the "Common Stock"). In
addition, the Company proposes to grant to the Underwriters the Over-Allotment
Option, referred to and defined in Section 2(c), to purchase all or any part of
an aggregate of 135,000 additional shares of Common Stock, and to issue to you
the Representative's Warrant, referred to and defined in Section 12, to purchase
certain further additional shares of Common Stock.
The 900,000 shares of Common Stock to be sold by the Company, together
with the 135,000 additional shares of Common Stock that are the subject of the
Over-Allotment Option, are herein collectively called the "Shares." The Shares
and the shares of Common Stock issuable upon exercise of the Representative's
Warrant, are herein collectively called the "Securities." The term
"Representative's Counsel" shall mean the firm of Harter, Secrest & Emery,
counsel to the Representative, and the term "Company Counsel" shall mean the
firm of Reid & Priest, LLP, counsel to the Company. Unless the context otherwise
requires, all references herein to a "Section" shall mean the appropriate
Section of this Agreement.
You have advised the Company that the Underwriters desire to purchase
the Shares as herein provided, and that you have been authorized to execute this
Agreement as representative of the Underwriters. The Company confirms the
agreements made by it with respect to the purchase of the Shares by the
Underwriters, as follows:
1. REPRESENTATIONS AND WARRANTIES.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each Underwriter that:
(A) REGISTRATION STATEMENT; PROSPECTUS. A registration state-
ment (File No. 333-15477) on Form S-1 relating to the public offering of the
Shares (the "Offering"), including a preliminary form of prospectus, copies of
which have heretofore been delivered to you, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations of the Securities and Exchange Commission
(the "Commission") promulgated thereunder (the "Rules and Regulations"), and has
been filed with the Commission under the Act. As used herein, the term
"Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule 430
or Rule 424(a) of the Rules and Regulations. The Preliminary Prospectus bore the
legend required by Item 501 of Regulation S-K under the Act and the Rules and
Regulations. Such registration statement (including all financial statements,
schedules and exhibits) as amended at the time it becomes effective and the
final prospectus included therein are herein respectively called the
"Registration Statement" and the "Prospectus," except that (i) if the prospectus
first filed by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and
Regulations shall differ from such final prospectus as then amended, then the
term "Prospectus" shall instead mean the prospectus first filed pursuant to said
Rule 424(b) or Rule 430A, and (ii) if such registration statement is amended or
such prospectus is amended or supplemented after the effective date of such
registration statement and prior to the Option Closing Date (as defined in
Section 2(c)), then (unless the context necessarily requires otherwise) the term
"Registration Statement" shall include such registration statement as so
amended, and the term "Prospectus" shall include such prospectus as so amended
or supplemented, as the case may be.
(B) CONTENTS OF REGISTRATION STATEMENT. On the Effective Date,
and at all times subsequent thereto for so long as the delivery of a prospectus
is required in connection with the offering or sale of any of the Securities,
(i) the Registration Statement and the Prospectus shall in all material respects
conform to the requirements of the Act and the Rules and Regulations, and (ii)
neither the Registration Statement nor the Prospectus shall include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriters specifically for
use in the preparation thereof. It is understood that the statements set forth
in the Prospectus with respect to stabilization, the material set forth under
the caption "UNDERWRITING," and the identity of counsel to the Representative
under the caption "LEGAL MATTERS," constitute the only information furnished in
writing by or on behalf of the Underwriters for inclusion in the Registration
Statement and Prospectus, as the case may be.
- 2 -
(C) ORGANIZATION, STANDING, ETC. The Company and each subsidiary
of the Company (a "Subsidiary") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full power and corporate authority to own its properties and
conduct its business as described in the Prospectus, and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
other jurisdiction in which the nature of its business or the character or
location of its properties requires such qualification, except where failure so
to qualify will not materially affect the business, properties or financial
condition of the Company or such Subsidiary, as the case may be.
(D) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company as of the date of the Prospectus is as set forth in
the Prospectus under the caption "CAPITALIZATION" and consists of 19,000,000
shares of Common Stock, $.01 par value, of which no more than 3,500,000 shares,
options, and Common Stock equivalents will be issued and outstanding or reserved
for issuance immediately prior to the First Closing Date. Except as set forth in
the Prospectus, no more than 500,000 shares of Common Stock will be reserved for
issuance under an employee stock option plan. The shares of Common Stock issued
and outstanding on the Effective Date have been duly authorized, validly issued
and are fully paid and nonassessable. Except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into issued by
or to which the Company or any Subsidiary is a party or bound, any shares of
capital stock of the Company or any Subsidiary. The Securities conform in all
material respects, issued by on to which the Company or any Subsidiary is a
party or bound to all statements relating thereto contained in the Registration
Statement or the Prospectus.
(E) SECURITIES. The Shares and the Representative's Warrant have
been duly authorized and, when issued and delivered against payment therefor
pursuant to this Agreement, the Shares will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company and the Representative's Warrant will be a valid and
binding obligation of the Company. Neither the filing of the Registration
Statement nor the offering or sale of any of the Shares or the Representative's
Warrant as contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the registration
of any securities of the Company, except as described in the Registration
Statement.
(F) AUTHORITY, ETC. This Agreement, the Representative's
Warrant, the Financial Consulting Agreement, and the M/A Agreement (each as
hereinafter defined) have been duly and validly authorized, executed and
delivered by the Company and, assuming due execution of this Agreement and such
other agreements by the other party or parties hereto and thereto, constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar
- 3 -
laws relating to or affecting creditors' rights generally or by general
equitable principles. The Company has full right, power and lawful authority to
authorize, issue and sell the Shares and the Representative's Warrant on the
terms and conditions set forth herein. All consents, approvals, authorizations
and orders of any court or governmental authority which are required in
connection with the authorization, execution and delivery of such agreements,
the authorization, issue and sale of the Shares and the Representative's
Warrant, and the consummation of the transactions contemplated hereby have been
obtained.
(G) NO CONFLICT. Except as described in the Prospectus, neither
the Company nor any Subsidiary is in violation, breach or default of or under,
and consummation of the transactions hereby contemplated and fulfillment of the
terms of this Agreement will not conflict with or result in a breach of, any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance pursuant to the terms
of, any contract, indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which the Company or such Subsidiary is a
party or by which the Company or such Subsidiary may be bound or to which any of
the property or assets of the Company or such Subsidiary are subject, nor will
such action result in any violation of the provisions of the Certificate of
Incorporation or the By-laws of the Company or any Subsidiary, or any statute,
order, rule or regulation applicable to the Company or any Subsidiary of any
court or governmental authority.
(H) ASSETS. Subject to the qualifications stated in the
Prospectus: (i) the Company and each Subsidiary, as the case may be, has good
and marketable title to all properties and assets described in the Prospectus as
owned by it, including without limitation intellectual property, free and clear
of all liens, charges, encumbrances or restrictions, except such as are not
materially significant or important in relation to its business or described in
or contemplated by the Prospectus; (ii) all of the material leases and subleases
under which the Company or any Subsidiary is the lessor or sublessor of
properties or assets or under which the Company or any Subsidiary holds
properties or assets as lessee or sublessee, as described in the Prospectus, are
in all material respects in full force and effect and, except as described in
the Prospectus, neither the Company nor any Subsidiary is in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and, to the Company's knowledge, no claim has been asserted
in writing by any party adverse to the rights of the Company or such Subsidiary
as lessor, sublessor, lessee or sublessee under any such lease or sublease, or
affecting or questioning the right of the Company or such Subsidiary to
continued possession of the leased or subleased premises or assets under any
such lease or sublease, except as described or referred to in the Prospectus;
and (iii) the Company and each Subsidiary, as the case may be, owns or leases
all such properties, described in the Prospectus, as are reasonably necessary to
its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(I) INDEPENDENT ACCOUNTANTS. BDO Seidman, L.L.P. and Ferro,
Berndon & Company, L.L.P., who have each given their report on certain financial
statements filed
- 4 -
or to be filed with the Commission as a part of the Registration Statement, and
which are included in the Prospectus, are with respect to the Company,
independent public accountants as required by the Act and the Rules and
Regulations.
(J) FINANCIAL STATEMENTS. The financial statements and
schedules, together with related notes, set forth in the Registration Statement
and the Prospectus present fairly the financial position, results of operations
and cash flows of the Company on the basis stated in the Registration Statement,
at the respective dates and for the respective periods to which they apply. Such
financial statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the entire period involved, except to the extent disclosed
therein. The audited financial statements, together with the related notes and
schedules and the unaudited financial information for each of the periods
presented in the Registration Statement and the Prospectus fairly present a true
and complete statement of the financial position of the Company at the dates
indicated and the results of their operations for the periods then ended. The
Summary Financial Information and Selected Financial Data included in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement and the Prospectus.
(K) NO MATERIAL CHANGE. Except as otherwise set forth in the
Prospectus, subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, neither the Company nor any
Subsidiary has: (i) incurred any liability or obligation, direct or contingent,
or entered into any transaction, which is material to its business; (ii)
effected or experienced any change in its capital stock; (iii) issued any
options, warrants or other rights to acquire its capital stock; (iv) declared,
paid or made any dividend or distribution of any kind on its capital stock; or
(v) effected or experienced any material adverse change, or development
involving a prospective material adverse change, in its business, property,
operations, condition (financial or otherwise) or earnings.
(L) LITIGATION. Except as set forth in the Prospectus, there is
not now pending nor, to the best knowledge of the Company, threatened, any
action, suit or proceeding (including any related to environmental matters or
discrimination on the basis of age, sex, religion or race), whether or not in
the ordinary course of business, to which the Company or any Subsidiary is a
party or its business or property is subject, before or by any court or
governmental authority, which might result in any material adverse change in the
business, property, operations, condition (financial or otherwise) or earnings
of the Company or such Subsidiary; and no labor disputes involving the employees
of the Company or any Subsidiary exist which might be expected to affect
materially adversely the business, property, operations, condition (financial or
otherwise) or earnings of the Company or such Subsidiary.
(M) NO UNLAWFUL PROSPECTUSES. The Company has not distributed
any prospectus or other offering material in connection with the Offering
contemplated herein,
- 5 -
other than any Preliminary Prospectus, the Prospectus or other material
permitted by the Act and the Rules and Regulations.
(N) TAXES. Except as disclosed in the Prospectus, the Company
and each Subsidiary has filed all necessary federal, state, local and foreign
income and franchise tax returns and has paid all taxes shown as due thereon or
has requested extension thereof, except in any case in which the failure so to
file or request an extension would not have a material adverse effect on the
Company; and there is no tax deficiency which has been or, to the best knowledge
of the Company, might be asserted against the Company or any Subsidiary.
(O) LICENSES, ETC. The Company and each Subsidiary has in effect
all necessary and material licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property, as described in the Prospectus, and is in all
material respects in compliance therewith, except in any case in which the
failure to so comply would not have a material adverse effect. The Company owns
or possesses adequate rights to use all material patents, patent applications,
trademarks, mark registrations, copyrights and licenses disclosed in the
Prospectus and/or which are necessary for the conduct of such business, and
except as disclosed in the Prospectus has not received any notice in writing of
conflict with the asserted rights of others in respect thereof. To the best
knowledge of the Company, none of the activities or business of the Company or
any Subsidiary is in violation of, or would cause the Company or such Subsidiary
to violate, any law, rule, regulation or order of the United States, any state,
county or locality, the violation of which would have a material adverse effect
upon the business, property, operations, condition (financial or otherwise) or
earnings of the Company or such Subsidiary.
(P) NO PROHIBITED PAYMENTS. Neither the Company nor any
Subsidiary have, directly or indirectly at any time: (i) made any contribution
to any candidate for political office, or failed to disclose fully any such
contribution in violation of law; or (ii) made any payment to any federal,
state, local or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
in all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
(Q) TRANSFER TAXES. On the Closing Dates (as defined in Section
2(d)), all transfer and other taxes (including franchise, capital stock and
other tax, other than income taxes, imposed by any jurisdiction), if any, which
are required to be paid in connection with the sale and transfer by the Company
of the Securities to the Underwriters hereunder shall have been fully paid or
provided for by the Company, and all laws imposing such taxes shall have been
fully complied with by the Company; it being expressly understood and agreed
that no representation or warranty is made hereby as to sales or transfers by
any underwriter.
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(R) EXHIBITS. All contracts and other documents of the Company
or any Subsidiary which are, under the Rules and Regulations, required to be
filed as exhibits to the Registration Statement have been so filed.
(S) SUBSIDIARIES. Except as described in the Prospectus, the
Company has no significant Subsidiaries, as defined under Section 1-02 of
Regulation S-X. All of the capital stock of each Subsidiary is owned by the
Company.
(T) SHAREHOLDER AGREEMENTS, REGISTRATION RIGHTS. Except as
described in the Prospectus, no security holder of the Company has any rights
with respect to the purchase, sale or registration of any Securities, and all
registration rights with respect to the Offering have been effectively waived.
2. PURCHASE, DELIVERY AND SALE OF SHARES.
(A) PURCHASE PRICE FOR SHARES. The Shares of Common Stock
shall be sold to and purchased by the Underwriters hereunder at the purchase
price of $6.37 per Share (that being the public offering price of $7.00 per
Share less an underwriting discount of 9.0 percent) (the "Purchase Price").
(B) FIRM SHARES.
(i) Subject to the terms and conditions of this Agreement,
and on the basis of the representations, warranties and agreements herein
contained the Company agrees to issue and sell to the Underwriters, severally
and not jointly, and each of the Underwriters agrees, severally and not jointly,
to buy from the Company at the Purchase Price, the number of Shares set forth
opposite such Underwriter's name in Schedule I hereto (the "Firm Shares").
(ii) Delivery of the Firm Shares against payment therefor
shall take place at the offices of the Representative, 1895 Mt. Hope Avenue,
Rochester, New York 14620 (the "Representative's Offices") (or at such other
place as may be designated by agreement between you and the Company) at 10:00
a.m., New York time, on February , 1997, or at such later time and date, not
later than ten banking days after the Effective Date, as you may designate (such
time and date of payment and delivery for the Firm Shares being herein called
the "First Closing Date"). Time shall be of the essence and delivery of the Firm
Shares at the time and place specified in this Section 2(b)(ii) is a further
condition to the obligations of the Underwriters hereunder.
(C) OPTION SHARES.
(i) In addition, subject to the terms and conditions of
this Agreement, and on the basis of the representations, warranties and
agreements herein contained, the Company hereby grants to the Underwriters an
option (the "Over-Allotment
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Option") to purchase from the Company all or any part of an aggregate of an
additional 180,000 Shares at the Purchase Price (the "Option Shares"). In the
event that the Over-Allotment Option is exercised by the Underwriters in whole
or in part, each Underwriter shall purchase Option Shares in the same proportion
as the number of Firm Shares purchased by it bore to the total number of Firm
Shares, unless you and the other Underwriters shall otherwise agree.
(ii) The Over-Allotment Option may be exercised by the
Underwriters, in whole or in part, within 45 days after the Effective Date, upon
notice by you to the Company advising it of the number of Option Shares as to
which the Over-Allotment Option is being exercised, the names and denominations
in which the certificates for the Shares comprising such Option Shares are to be
registered, and the time and date when such certificates are to be delivered.
Such time and date shall be determined by you but shall not be less than four
nor more than ten banking days after exercise of the Over-Allotment Option, nor
in any event prior to the First Closing Date (such time and date being herein
called the "Option Closing Date"). Delivery of the Option Shares against payment
therefor shall take place at the Representative's Offices. Time shall be of the
essence and delivery at the time and place specified in this Section 2(c)(ii) is
a further condition to the obligations of the Underwriters hereunder.
(iii) The Over-Allotment Option may be exercised only to
cover over-allotments in the sale by the Underwriters of Firm Shares.
(D) DELIVERY OF CERTIFICATES; PAYMENT.
(i) The Company shall make the certificates for the Shares
to be purchased hereunder available to you for checking at least one banking day
prior to the First Closing Date or the Option Closing Date (each, a "Closing
Date"), as the case may be. The certificates shall be in such names and
denominations as you may request at least two banking days prior to the relevant
Closing Date. Time shall be of the essence and the availability of the
certificates at the time and place specified in this Section 2(d)(i) is a
further condition to the obligations of the Underwriters hereunder.
(ii) On the First Closing Date: (A) the Company shall
deliver to you for the several accounts of the Underwriters definitive engraved
certificates in negotiable form representing all of the Firm Shares to be sold
by the Company, against payment of the Purchase Price therefor by you for the
several accounts of the Underwriters, by certified or bank cashier's checks
payable in next day funds to the order of the Company, such payment to be made
not later than ten days after the Effective Date.
(iii) In addition, if and to the extent that the
Underwriters exercise the Over-Allotment Option, then on the Option Closing
Date: (A) the Company shall deliver to you for the several accounts of the
Underwriters definitive engraved certificates in negotiable form representing
the Shares comprising the Option Shares to be sold by the Company,
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against payment of the Purchase Price therefor by you for the several accounts
of the Underwriters, by certified or bank cashier's checks payable in next day
funds to the order of the Company.
(iv) It is understood that the Underwriters propose to
offer the Shares to be purchased hereunder to the public, upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement becomes effective.
3. COVENANTS.
COVENANTS OF THE COMPANY. The Company covenants and agrees with each
Underwriter that:
(A) REGISTRATION.
(i) The Company shall use its best efforts to cause the
Registration Statement to become effective and, upon notification from the
Commission that the Registration Statement has become effective, shall so advise
you and shall not at any time, whether before or after the Effective Date, file
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus of which you shall not previously have been advised and furnished
with a copy, or to which you or Representative's Counsel shall have objected in
writing, or which is not in compliance in all material respects with the Act and
the Rules and Regulations. At any time prior to the later of (A) the completion
by the Underwriters of the distribution of the Shares contemplated hereby (but
in no event more than nine months after the Effective Date), and (B) 25 days
after the Effective Date, the Company shall prepare and file with the
Commission, promptly upon your request, any amendments to the Registration
Statement or any amendments or supplements to the Prospectus which, in your
reasonable opinion, may be necessary or advisable in connection with the
distribution of the Shares.
(ii) Promptly after you or the Company shall have been
advised thereof, you shall advise the Company or the Company shall advise you,
as the case may be, and confirm such advice in writing, of (A) the receipt of
any comments of the Commission, (B) the effectiveness of any post-effective
amendment to the Registration Statement, (C) the filing of any supplement to the
Prospectus or any amended Prospectus, (D) any request made by the Commission for
amendment of the Registration Statement or amendment or supplementing of the
Prospectus, or for additional information with respect thereto, or (E) the
issuance by the Commission or any state or regulatory body of any stop order or
other order denying or suspending the effectiveness of the Registration
Statement, or preventing or suspending the use of any Preliminary Prospectus, or
suspending the qualification of the Securities for offering in any jurisdiction,
or otherwise preventing or impairing the Offering, or the institution or threat
of any proceeding for any of such purposes. The Company and you shall not
acquiesce in such order or proceeding, and shall
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instead actively defend such order or proceeding, unless the Company and you
agree in writing to such acquiescence.
(iii) The Company has caused to be delivered to you copies
of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters and selected dealers to use the Prospectus
in connection with the sale of the Shares for such period as in the opinion of
Representative's Counsel the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a prospectus is required under the
Act to be delivered in connection with sales by an underwriter or dealer, of any
event of which the Company has knowledge and which materially affects the
Company or the Securities, or which in the opinion of Company Counsel or of
Representative's Counsel should be set forth in an amendment to the Registration
Statement or an amendment or supplement to the Prospectus in order to make the
statements made therein not then misleading, in light of the circumstances
existing at the time the Prospectus is required to be delivered to a purchaser
of the Shares, or in case it shall be necessary to amend or supplement the
Prospectus to comply with the Act or the Rules and Regulations, the Company
shall notify you promptly and forthwith prepare and furnish to the Underwriters
copies of such amended Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request, in order that the
Prospectus, as so amended or supplemented, shall not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of each such amendment to the Registration Statement, amended
Prospectus or supplement to be attached to the Prospectus shall be without
expense to the Underwriters, except that in the case that the Underwriters are
required, in connection with the sale of the Shares, to deliver a prospectus
nine months or more after the Effective Date, the Company shall upon your
request and at the expense of the Underwriters, amend the Registration Statement
and amend or supplement the Prospectus, or file a new registration statement on
Form SB-2 (if applicable) or Form S-1, if necessary, and furnish the
Underwriters with reasonable quantities of prospectuses complying with section
10(a)(3) of the Act.
(iv) The Company shall comply with the Act, the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder in connection with
the offering and issuance of the Securities.
(B) BLUE SKY. The Company shall, at its own expense, use its
best efforts to qualify or register the Securities for sale under the securities
or "blue sky" laws of such jurisdictions as you may designate, and shall make
such applications and furnish such information to Representative's Counsel as
may be required for that purpose, and shall comply with such laws; provided,
however, that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent to
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service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Shares. The Company shall bear all of the expense
of such qualifications and registrations, including without limitation the legal
fees and disbursements of Representative's Counsel, which fees, exclusive of
disbursements, shall not exceed $25,000 (unless otherwise agreed). After each
Closing Date the Company shall, at its own expense, from time to time prepare
and file such statements and reports as may be required to continue each such
qualification in effect for so long a period as you may reasonably request.
(C) EXCHANGE ACT REGISTRATION. The Company shall, at its own
expense, prepare and file with the Commission a registration statement (on Form
8-A) under section 12(g) or 12(b) of the Exchange Act and will use its best
efforts to have such registration statement declared effective by the Commission
concurrently with the Registration Statement being declared effective. The
Company shall use its best efforts to cause such registration statement to be
declared effective and maintained in effect for at least five years from the
Effective Date.
(D) PROSPECTUS COPIES. The Company shall deliver to you on or
before the First Closing Date two signed copies of the Registration Statement
including all financial statements, schedules and exhibits filed therewith, and
of all amendments thereto. The Company shall deliver to or on the order of the
Underwriters, from time to time until the Effective Date, as many copies of any
Registration Statement, Preliminary Prospectus and related exhibits filed with
the Commission prior to the Effective Date as the Underwriters may reasonably
request. The Company shall deliver to the Underwriters on the Effective Date,
and thereafter for so long as a prospectus is required to be delivered under the
Act, from time to time, as many copies of the Registration Statement,
Prospectus, and related exhibits in final form, or as thereafter amended or
supplemented, as the Underwriters may from time to time reasonably request.
(E) AMENDMENTS AND SUPPLEMENTS. The Company shall, promptly upon
your request, prepare and file with the Commission any amendments to the
Registration Statement, and any amendments or supplements to the Preliminary
Prospectus or the Prospectus, and take any other action which in the reasonable
opinion of Representative's Counsel may be reasonably necessary or advisable in
connection with the distribution of the Shares, and shall use its best efforts
to cause the same to become effective as promptly as possible.
(F) CERTAIN MARKET PRACTICES. The Company has not taken, and
shall not take, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result in, or which has constituted, the
stabilization or manipulation of the price of the Securities to facilitate the
sale or resale thereof.
(G) CERTAIN REPRESENTATIONS. Neither the Company nor any
representative of the Company has made or shall make any written or oral
representation in connection with the Offering and sale of the Shares or the
Representative's Warrant which is not contained in
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the Prospectus, which is otherwise inconsistent with or in contravention of any
thing contained in the Prospectus, or which shall constitute a violation of the
Act, the Rules and Regulations, the Exchange Act or the rules and regulations
promulgated under the Exchange Act.
(H) CONTINUING REGISTRATION OF WARRANTS AND UNDERLYING COMMON
STOCK. For so long as any portion of the Representative's Warrant is
outstanding, the Company shall, at its own expense: (i) use its best efforts to
cause post-effective amendments to the Registration Statement, or new
registration statements (which may be on Forms SB-2, S-l, S-2 or S-3, as the
case may be) relating to the Representative's Warrant and the Common Stock
underlying the Representative's Warrants to become effective in compliance with
the Act and without any lapse of time between the effectiveness of the
Registration Statement and of any such post-effective amendment or new
registration statement; (ii) cause a copy of each Prospectus, as then amended,
to be delivered to each holder of record of any portion of the Representative's
Warrant; (iii) furnish to the Underwriters and dealers as many copies of each
such Prospectus as the Underwriters or dealers may reasonably request; and (iv)
maintain the "blue sky" qualification or registration of the Representative's
Warrant and the Common Stock underlying the Representative's Warrant, or have a
currently available exemption therefrom, in each jurisdiction in which the
Securities were so qualified or registered for purposes of the Offering. In
addition, for so long as the Representative's Warrant is outstanding, the
Company shall promptly notify you of any material change in the business,
financial condition or prospects of the Company.
(I) USE OF PROCEEDS. The Company shall apply the net proceeds
from the sale of the Shares for the purposes set forth in the Prospectus under
the caption "USE OF PROCEEDS," and shall file such reports with the Commission
with respect to the sale of the Shares and the application of the proceeds
therefrom as may be required pursuant to Rule 463 of the Rules and Regulations.
(J) TWELVE MONTHS' EARNINGS STATEMENT. The Company shall make
generally available to its security holders and deliver to you as soon as it is
practicable so to do, but in no event later than 90 days after the end of twelve
months after the close of its current fiscal quarter, an earnings statement
(which need not be audited) covering a period of at least twelve consecutive
months beginning after the Effective Date, which shall satisfy the requirements
of section 11(a) of the Act and may be made available in accordance with Rule
158 of the Rules and Regulations.
(K) NASDAQ, EXCHANGE LISTINGS, ETC. The Company shall
immediately make all filings required to seek approval for the quotation of the
Securities on The Nasdaq SmallCap Market System ("NASDAQ") and shall use
reasonable efforts to effect and maintain such approval for at least five years
from the Effective Date. The Company shall also use its reasonable efforts to
cause the Shares to be accepted for listing on the Pacific Stock Exchange,
and/or such other exchange acceptable to you, prior to the Effective Date or,
failing that, as soon as is possible after the First Closing Date, and to
maintain such
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listings for five years. Within 10 days after the Effective Date, the Company
shall also use its best efforts to list itself in Moody's OTC Industrial Manual
and to cause such listing to be maintained for at least five years from the
Effective Date.
(L) BOARD OF DIRECTORS. The Company shall maintain a Board of
Directors comprised of a minimum of five and a maximum of eleven directors, at
least a majority of whom shall be neither employed by nor otherwise affiliated
with the Company. The Board of Directors shall hold at least four meetings
annually.
(M) PERIODIC REPORTS. For so long as the Company is a reporting
company under section 12(g) or section 15(d) of the Exchange Act, the Company
shall, at its own expense, furnish to its shareholders an annual report
(including financial statements audited by certified public accountants)
complying with the requirements of Section 14a-3 under the Exchange Act or any
successor provision. In addition, during the period ending five years from the
date hereof, the Company shall, at its own expense, furnish to you: (i) within
90 days of the end of each fiscal year, a balance sheet of the Company and its
Subsidiaries as at the end of such fiscal year, together with statements of
income, stockholders' equity and cash flows of the Company and its Subsidiaries
as at the end of such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of certified public accountants; (ii)
as soon as they are available, a copy of all reports (financial or otherwise)
distributed to security holders; and (iii) as soon as they are available, a copy
of all non-confidential reports and financial statements furnished to or filed
with the Commission; and (iv) such other information as you may from time to
time reasonably request. The financial statements referred to herein shall be on
a consolidated basis to the extent the accounts of the Company and its
Subsidiaries are consolidated in reports furnished to its shareholders
generally. In addition, during the period ending one year from the date hereof,
the Company shall, at its own expense, furnish you monthly with Depository Trust
Company stock transfer sheets.
(N) CERTAIN OPTIONS. For a period of 90 days following the First
Closing Date, the Company shall not, without your prior written consent, grant
any options, warrants or other rights to purchase shares of Common Stock at a
price less than the initial public Offering price of the Shares.
(O) FORM S-8 REGISTRATIONS. For a period of one year following
the First Closing Date, the Company shall not register or otherwise facilitate
the registration of any of its securities issuable upon the exercise of options,
warrants (other than the Representative's Warrant) or other rights, whether by
means of a Registration Statement on Form S-8 or otherwise, without your prior
written consent.
(P) FUTURE SALES. For a period of 12 months following the
Effective Date, the Company shall not sell or otherwise dispose of any
securities of the Company without your prior written consent, which consent
shall not be unreasonably withheld; provided, however, that the Company may at
any time issue shares of Common Stock pursuant to the
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exercise of the Representative's Warrant, and options, warrants or other
convertible securities issued and outstanding prior to the Effective Date and
described in the Prospectus, and with respect to any acquisition or joint
venture by the Company. In addition, for a period of three years following the
First Closing Date, the Company shall not sell or otherwise dispose of any
shares of Preferred Stock without your prior written consent. Furthermore, for a
period of 18 months from the Effective Date, the Company shall not sell or issue
any securities pursuant to Regulation S under the Act without your prior written
consent.
(Q) RULE 144 SALES. The Company shall cause each of its officers
and directors to provide you the right, for a period of three years following
the First Closing Date, to purchase for your own account, or to sell for the
account of such person, all securities of the Company sold by such person
pursuant to Rule 144 of the Rules and Regulations. The Company shall use its
reasonable efforts to cause each of the other beneficial holders as of the date
hereof of at least 5 percent of the Company's securities to provide you the
right, for a period of three years following the First Closing Date, to purchase
for your own account, or to sell for the account of such holder, all securities
of the Company sold by such holder pursuant to said Rule 144.
(R) AVAILABLE SHARES. The Company shall reserve and at all times
keep available that maximum number of its authorized but unissued shares of
Common Stock which are issuable upon exercise of the Representative's Warrant,
taking into account the anti-dilution provisions thereof.
(S) AGREEMENT OF MANAGEMENT AND SHAREHOLDERS. On or before the
Effective Date, the Company shall cause the parties named therein to execute and
deliver to you an agreement, in the form previously delivered to the Company by
you, regarding certain undertakings by such parties in connection with the
Offering (the "Agreement of Management and Shareholders").
(T) FINANCIAL CONSULTING AGREEMENT. On the First Closing Date
and simultaneously with the delivery of the Firm Shares, the Company shall
execute and deliver to you an agreement with you, in the form previously
delivered to the Company by you, regarding your services as a financial
consultant to the Company (the "Financial Consulting Agreement").
(U) M/A AGREEMENT. On the First Closing Date and simultaneously
with the delivery of the Firm Shares, the Company shall execute and deliver to
you an agreement with you, in the form previously delivered to the Company by
you, regarding mergers, acquisitions, joint ventures and certain other forms of
transactions (the "M/A Agreement").
(V) MANAGEMENT. On each Closing Date, management of the Company
shall consist of Seymour Gussack, as Chairman of the Board, David L. Gussack, as
President, and Christopher Moore, as Vice President-Finance. Prior to the
Effective Date the
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Company shall have obtained "key man" life insurance coverage on the lives of
Seymour Gussack and David L. Gussack, naming the Company as beneficiary and
having a face value of at least $1,000,000, for terms, and with an insurance
agency, mutually agreed upon by the Company and you. The Company shall use its
best efforts to maintain such insurance during the three-year period commencing
on the First Closing Date.
(W) PUBLIC RELATIONS. Prior to the Effective Date the Company
shall have retained a public relations firm reasonably acceptable to you, and
shall continue to retain such firm, or an alternate firm acceptable to you, for
a minimum period of two years on such terms as are acceptable to you.
(X) BOUND VOLUMES. Within 90 days from the First Closing Date,
the Company shall deliver to you, at the Company's expense, three bound volumes
in form and content acceptable to you, containing the Registration Statement and
all exhibits filed therewith and all amendments thereto, and all other
agreements, correspondence, filings, certificates and other documents filed and
delivered in connection with the Offering.
(Y) BOARD OBSERVER. For a period of 36 months from the Effective
Date, the Company shall allow an observer designated by you and acceptable to
the Company, to receive notice of and to attend all meetings of the Board of
Directors of the Company. Such observer shall have no voting rights, and shall
be reimbursed by the Company for all reasonable out-of-pocket expenses incurred
in attending such meetings. The Company shall hold at least four meetings per
year and the observer will be indemnified by the Company (to the same extent the
Company provides for indemnification of its directors) against any claims
arising out of his participation at Board meetings.
(Z) CHIEF FINANCIAL OFFICER. Prior to the Effective Date, the
Company shall have hired a Chief Financial Officer or have made other
arrangements satisfactory to you, and shall retain an individual in such
position for a minimum period of three years following the Effective Date.
(AA) STOCK TRANSFER SHEETS. The Company shall supply you with
DTC Stock Transfer sheets on a weekly basis for the first six weeks following
the First Closing Date, and for six weeks following the Option Closing Date, and
on a monthly basis thereafter.
4. CONDITIONS TO UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares which they have agreed
to purchase hereunder are subject to the accuracy (as of the date hereof and as
of each Closing Date) of and compliance with the representations and warranties
of the Company contained herein, the performance by the Company of all of its
respective obligations hereunder, and the Agreement of Management and
Shareholders, and the following further conditions:
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(A) EFFECTIVE REGISTRATION STATEMENT; NO STOP ORDER. The
Registration Statement shall have become effective and you shall have received
notice thereof not later than 6:00 p.m., New York time, on the date of this
Agreement, or at such later time or on such later date as to which you may agree
in writing. In addition, on each Closing Date (i) no stop order denying or
suspending the effectiveness of the Registration Statement shall be in effect,
and no proceedings for that or any similar purpose shall have been instituted or
shall be pending or, to your knowledge or to the knowledge of the Company, shall
be contemplated by the Commission, and (ii) all requests on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Representative's Counsel.
(B) OPINION OF COMPANY COUNSEL. On the First Closing Date, you
shall have received the opinion, dated as of the First Closing Date, of Company
Counsel, in form and substance satisfactory to Representative's Counsel, to the
effect that:
(i) the Company and each Subsidiary has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware, with full corporate power and authority to own
its properties and conduct its business as described in the Prospectus, and, to
such counsel's knowledge, is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each other jurisdiction in which
the nature of its business or the character or location of its properties
requires such qualification, except where failure so to qualify will not
materially affect the business, properties or financial condition of the Company
or such Subsidiary;
(ii) (A) the authorized capitalization of the Company as of
the date of the Prospectus was as is set forth in the Prospectus under the
caption "CAPITALIZATION;" (B) all of the shares of Common Stock now outstanding
have been duly authorized and validly issued, are fully paid and non-assessable,
conform in all material respects to the description thereof contained in the
Prospectus, have not been issued in violation of the preemptive rights of any
shareholder and, to such counsel's knowledge, except as described in the
Prospectus, are not subject to any restrictions upon the voting or transfer
thereof under the Delaware General Corporation Law; (C) all of the Shares have
been duly authorized and, when paid for as provided herein, shall be validly
issued, fully paid and non-assessable, shall not have been issued in violation
of the preemptive rights of any shareholder, and no personal liability shall
attach to the ownership thereof; (D) the shareholders of the Company do not have
any preemptive rights or, to such counsel's knowledge, other rights to subscribe
for or purchase, and there are no restrictions upon the voting or transfer of,
any of the Shares and the shares of Common Stock underlying the Representative's
Warrant other than any such restrictions created by agreement of the
Representative or its transferees,
- 16 -
federal and state securities laws and the By-laws of the National Association of
Securities Dealers, Inc.; (E) the Shares and the Representative's Warrant
conform to their respective descriptions thereof contained in the Prospectus;
(F) to such counsel's knowledge, all prior sales of the Company's securities
have been made in compliance with, or under an exemption from, the Act; (G) a
sufficient number of shares of Common Stock have been reserved for issuance,
upon exercise of the Representative's Warrant is outstanding; and (H) to the
knowledge of such counsel, neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any registration rights or other rights, other than those which have been
effectively waived or satisfied, for or relating to the registration of any
securities of the Company;
(iii) the certificates evidencing the Shares are each in
valid and proper legal form under the Delaware General Corporation Law; and the
Representative's Warrant is exercisable for shares of Common Stock in accordance
with its terms and at the prices therein provided for;
(iv) this Agreement, the Representative's Warrant, the
Financial Consulting Agreement and the M/A Agreement have been duly and validly
authorized, executed and delivered by the Company and (assuming due execution
and delivery thereof by each party thereto other than the Company all of such
agreements are, or when duly executed shall be, the valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms (except as enforceability may be limited by bankruptcy, insolvency or
other laws affecting the rights of creditors generally); provided, however, that
no opinion need be expressed as to the enforceability of the indemnity
provisions contained in Section 6 or the contribution provisions contained in
Section 7;
(v) to the knowledge of such counsel, (A) other than as
described or referred to in the Registration Statement there is no legal or
governmental proceeding pending or threatened in writing affecting the Company
or any Subsidiary which could materially and adversely affect the business,
property, operations, condition (financial or otherwise) or earnings of the
Company or such Subsidiary, or which questions the validity of the Offering, the
Securities, this Agreement, the Representative's Warrant, the Financial
Consulting Agreement or the M/A Agreement, or of any action taken or to be taken
by the Company pursuant thereto; and (B) there is no legal or governmental
proceeding or regulation required to be described or referred to in the
Registration Statement which is not so described or referred to;
(vi) to the knowledge of such counsel, the execution and
delivery hereof and the Representative's Warrant, the Financial Consulting
- 17 -
Agreement or the M/A Agreement and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or therein
contemplated shall not result in a violation of, or constitute a default under,
the Certificate of Incorporation or By-laws of the Company, or, to such
counsel's knowledge, any material obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness, or in
any material contract, indenture, mortgage, loan agreement, lease, joint venture
or other agreement or instrument to which the Company is a party or by which its
assets are bound, or any material order, rule, regulation, writ, injunction or
decree of any government, governmental instrumentality or court;
(vii) the Registration Statement has become effective under
the Act, and to the best knowledge of such counsel, no stop order denying or
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for that or any similar purpose have been instituted or are pending
before or threatened by the Commission;
(viii) the Registration Statement and the Prospectus
(except for the financial statements, notes thereto and other financial
information and statistical data contained therein, as to which no opinion need
be rendered), comply as to form in all material respects with the Act and the
Rules and Regulations;
(ix) all descriptions contained in the Registration
Statement or the Prospectus of contracts and other documents are accurate and
fairly present the information required to be described in all material
respects, and such counsel is familiar with all contracts and other documents
referred to in the Registration Statement and the Prospectus or filed as
exhibits to the Registration Statement and, to the best knowledge of such
counsel, no contract or document of a character required to be summarized or
described therein or to be filed as an exhibit thereto is not so summarized,
described or filed;
(x) the descriptions contained in the Registration
Statement and the Prospectus which purport to summarize the provisions of
statutes, rules and regulations are accurate summaries in all material respects,
and such descriptions fairly present in all material respects the information
shown, and the descriptions contained in the Registration Statement and the
Prospectus that concern matters of law or legal conclusions have been reviewed
by such counsel and are correct in all material respects;
(xi) The Agreement of Management and Shareholders has been
duly and validly executed and delivered by each party thereto (other than
American Stock Transfer & Trust Company); and
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(xii) except for registration under the Act and
registration or qualification of the Securities under applicable state or
foreign securities or blue sky laws (as to which no opinion is rendered), no
authorization, approval, consent or license of any governmental or regulatory
authority or agency is necessary in connection with: (A) the authorization,
issuance, sale, transfer or delivery of the Securities by the Company; (B) the
execution, delivery and performance of this Agreement by the Company or the
taking of any action contemplated herein; (C) the issuance of the
Representative's Warrant or the Shares of Common Stock issuable upon exercise
thereof; or (D) the execution, delivery and performance of this Agreement by the
Company or the taking of any action contemplated herein.
We have participated in conferences with officers and other representatives of
the Company, the Representatives of the Underwriters and their counsel and
representatives of the independent certified public accountants of the Company,
at which the contents of the Registration Statement and the Prospectus and
related matters were discussed and although we have not verified or checked the
accuracy, completeness or fairness of the statements and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, on the basis of the
foregoing, no fact has come to our attention which causes us to believe that, at
the time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date, the Registration Statement and any
amendment or supplement thereto contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact necessary to make
the statements therein not misleading, or that the Prospectus as of this date or
at the Closing Date, included or includes any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that we express no comment or belief with
respect to the financial statements or other financial data set forth in the
Registration Statement and in the Prospectus. Such opinion shall also cover such
matters incident to the transactions contemplated hereby as you or
Representative's Counsel shall reasonably request. In rendering such opinion,
Company Counsel may rely as to matters of fact upon certificates of officers of
the Company, and of public officials and may rely as to all matters of law other
than the law of the United States or the States of Delaware or New York upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled so to
rely.
(C) CORPORATE PROCEEDINGS. All corporate proceedings and other
legal matters relating to this Agreement, the Registration Statement, the
Prospectus and other related matters shall be reasonably satisfactory to or
approved by Representative's Counsel, and you shall have received from such
counsel a signed opinion, dated as of the First Closing Date, with respect to
the validity of the issuance of the Securities, the form of the Registration
Statement and Prospectus (other than the financial statements and other
financial or statistical data contained therein), the execution of this
Agreement and other related
- 19 -
matters as you may reasonably require. The Company shall have furnished to
Representative's Counsel such documents as they may reasonably request for the
purpose of enabling them to render such opinion.
(D) COMFORT LETTER. Prior to the Effective Date, and again on
and as of the First Closing Date, you shall have received letters from BDO
Seidman LLP and Ferro, Berndon & Company, L.L.P., certified public accountants
for the Company, substantially in the form approved by you with respect to the
unaudited financial statements and other financial information and other data
contained in the Registration Statement with regard to the period from the date
of the audited financial statements to a date not more than five days prior to
the Effective Date, the First Closing Date and the Option Closing Date,
respectively.
(E) BRING DOWN. At each of the Closing Dates, (i) the
representations and warranties of the Company contained in this Agreement shall
be true and correct with the same effect as if made on and as of such Closing
Date, and the Company shall have performed all of its respective obligations
hereunder and satisfied all the conditions to be satisfied at or prior to such
Closing Date; (ii) the Registration Statement and the Prospectus shall contain
all statements which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and shall in all material respects conform to
the requirements of the Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus shall contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading; (iii) there
shall have been, since the respective dates as of which information is given, no
material adverse change in the business, property, operations, condition
(financial or otherwise), earnings, capital stock, long-term or short-term debt
or general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration Statement
and Prospectus indicate might occur after the Effective Date, and the Company
shall not have incurred any material liabilities nor entered into any material
agreement other than as referred to in the Registration Statement and
Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or
proceeding shall be pending or threatened against the Company which would be
required to be disclosed in the Registration Statement, and no proceedings shall
be pending or threatened against the Company before or by any commission, board
or administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially adversely affect the
business, property, operations, condition (financial or otherwise), earnings or
general affairs of the Company. In addition, you shall have received, at the
First Closing Date, a certificate signed by the principal executive officer and
by the principal financial officer of the Company, dated as of the First Closing
Date, evidencing compliance with the provisions of this Section 4(e), evidencing
as to him compliance with the provisions of this Section 4(e).
(F) TRANSFER AND WARRANT AGENT. On or before the Effective Date,
the Company shall have appointed American Stock Transfer & Trust Company (or
other agent mutually acceptable to the Company and you), as its transfer agent
and warrant agent to
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transfer all of the Shares issued in the Offering, as well as to transfer other
shares of the Common Stock outstanding from time to time, including those
issuable upon exercise of the Representative's Warrant.
(G) CERTAIN FURTHER MATTERS. On each Closing Date,
Representative's Counsel shall have been furnished with all such other documents
and certificates as they may reasonably request for the purpose of enabling them
to render their legal opinion to the Underwriter and in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the Company on
or prior to each of the Closing Dates in connection with the authorization,
issuance and sale of the Securities as herein contemplated shall be reasonably
satisfactory in form and substance to you and to Representative's Counsel.
(H) ADDITIONAL CONDITIONS. Upon exercise of the Over-Allotment
Option, the Underwriters' obligations to purchase and pay for the Option Shares
shall be subject (as of the date hereof and as of the Option Closing Date) to
the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, no stop order denying or suspending the effectiveness
thereof shall have been issued, and no proceedings for that or any similar
purpose shall have been instituted or shall be pending or, to your knowledge or
the knowledge of the Company, shall be contemplated by the Commission, and all
reasonable requests on the part of the Commission for additional information
shall have been complied with to the satisfaction of Representative's Counsel.
(ii) On the Option Closing Date there shall have been
delivered to you the signed opinion of Company Counsel, dated as of the Option
Closing Date, in form and substance satisfactory to Representative's Counsel,
which opinion shall be substantially the same in scope and substance as the
opinion furnished to you on the First Closing Date pursuant to Section 4(b),
except that such opinion, where appropriate, shall cover the Option Shares
rather than the Firm Shares. If the First Closing Date is the same as the Option
Closing Date, such opinions may be combined.
(iii) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option Shares shall
be reasonably satisfactory in form and substance to you, and you and
Representative's Counsel shall have been furnished with all such documents,
certificates and opinions as you may request in connection with this transaction
in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its compliance with
any of the covenants or conditions contained herein.
(iv) On the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory to you from BDO
Seidman LLP and Ferro, Berndon & Company, L.L.P. dated the Option Closing Date
and addressed to you,
- 21 -
confirming the information in their letter referred to in Section 4(d) as of the
date thereof and stating that, without any additional investigation required,
nothing has come to their attention during the period from the ending date of
their review referred to in such letter to a date not more than five banking
days prior to the Option Closing Date which would require any change in such
letter if it were required to be dated the Option Closing Date.
(v) On the Option Closing Date there shall have been
delivered to you a certificate signed by the principal executive officer and by
the principal financial or accounting officer of the Company, dated the Option
Closing Date, in form and substance satisfactory to Representative's Counsel,
substantially the same in scope and substance as the certificate furnished to
you on the First Closing Date pursuant to Section 4(e).
(I) CANCELLATION. If any of the conditions provided by this
Section 4 shall not have been completely fulfilled as of the date indicated,
then this Agreement and all obligations of the Underwriters hereunder may be
cancelled at, or at any time prior to, either Closing Date by your notifying the
Company of such cancellation in writing or by telegram at or prior to the
applicable Closing Date. Any such cancellation shall be without liability of the
Underwriters to the Company, except as otherwise provided herein.
5. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of
the Company to sell and deliver the Shares are subject to the following
conditions:
(A) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement
shall have become effective not later than 6:00 p.m. New York time, on the date
of this Agreement, or at such later time or on such later date as the Company
and you may agree in writing.
(B) NO STOP ORDER. On the applicable Closing Date, no stop order
denying or suspending the effectiveness of the Registration Statement shall have
been issued under the Act or any proceedings therefor initiated or threatened by
the Commission.
(C) PAYMENT FOR SHARES. On the applicable Closing Date, you
shall have made payment, for the several accounts of the Underwriters, of the
aggregate Purchase Price for the Shares then being purchased, by certified or
bank cashier's checks payable in next day funds to the order of the Company.
If the conditions to the obligations of the Company provided by this Section 5
have been fulfilled on the First Closing Date but are not fulfilled after the
First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Shares upon exercise of
the Over-Allotment Option shall be affected.
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6. INDEMNIFICATION.
(A) INDEMNIFICATION BY THE COMPANY. As used in this Agreement,
the term "Liabilities" shall mean any and all losses, claims, damages and
liabilities, and actions and proceedings in respect thereof (including without
limitation all reasonable costs of defense and investigation and all attorneys'
fees) including without limitation those asserted by any party to this Agreement
against any other party to this Agreement. The Company hereby indemnifies and
holds harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act, from and against all Liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act or otherwise, insofar as such Liabilities arise
out of or are based upon: (i) any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement or any
amendment thereto, or the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto, or (B) any "blue sky" application or other
document executed by the Company specifically for that purpose, or based upon
written information furnished by the Company, filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
herein called a "Blue Sky Application"); or (ii) the omission or alleged
omission to state in the Registration Statement or any amendment thereto, or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or in any Blue Sky Application, a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company shall not be liable in any such case to the extent,
but only to the extent, that (i) any such Liabilities arise out of or are based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company through you by or on behalf of any Underwriter
specifically for use in the preparation of the Registration Statement or any
such amendment thereto, or (ii) the Prospectus or any such Preliminary
Prospectus, or any such amendment or supplement thereto, or any such Blue Sky
Application in or with respect to any untrue statement or material omission in a
Preliminary Prospectus to the extent such misstatement or omission is corrected
in the Prospectus or any amendment or supplement thereto and any underwriter
fails to deliver such Prospectus, supplement or amendment. The foregoing
indemnity shall be in addition to any other liability which the Company may
otherwise have.
(B) INDEMNIFICATION BY UNDERWRITERS. Each Underwriter, severally
and not jointly, hereby indemnifies and holds harmless the Company, each of its
directors, each nominee (if any) for director named in the Prospectus, each of
its officers who have signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, from and against
all Liabilities to which the Company or any such director, nominee, officer or
controlling person may become subject under the Act or otherwise, insofar as
such Liabilities arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, or the Prospectus or any Preliminary
Prospectus, or any amendment or supplement thereto, or (ii) the omission or the
alleged omission to state therein a material
- 23 -
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such Liabilities arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the Registration
Statement or any amendment thereto, or the Prospectus or any Preliminary
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company through you, by or
on behalf of such Underwriter, specifically for use in the preparation thereof.
In no event shall any Underwriter be liable or responsible for any amount in
excess of the compensation received by such Underwriter, in the form of
underwriting discounts or otherwise, pursuant to this Agreement or any other
agreement contemplated hereby. The foregoing indemnity shall be in addition to
any other liability which any Underwriter may otherwise have.
(C) PROCEDURE. Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify in writing the indemnifying
party of the commencement thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 6. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions hereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided,
however, that if the indemnified party is any Underwriter or a person who
controls any Underwriter within the meaning of the Act, the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party, or (ii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying party and, indemnified party is advised by counsel that it has
separate defenses (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of such Underwriter or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys). No settlement of any
action against an indemnified party shall be
- 24 -
made without the consent of the indemnified party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnified
party.
7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (a) any indemnified party makes
claims for indemnification pursuant to Section 6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (b) contribution under the Act may be required on the part of any
indemnified party, then such indemnified party and each indemnifying party (if
more than one) shall contribute to the aggregate Liabilities to which it may be
subject, in either such case (after contribution from others) in such
proportions that the Underwriters are responsible in the aggregate for that
portion of such Liabilities represented by the percentage that the underwriting
discount per Share plus the (i) non-accountable expense allowance and (ii)
amount of financial consulting agreement appearing on the cover page of the
Prospectus bears to the public Offering price per Share appearing thereon, and
the Company shall be responsible for the remaining portion; provided, however,
that if such allocation is not permitted by applicable law, then the relative
fault of the Company, and the Underwriters in connection with the statements or
omissions which resulted in such Liabilities and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Underwriters, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriters to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate Liabilities (even if the Underwriters were to be treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Section 7. In addition, the contribution of any Underwriter shall not be in
excess of its proportionate share of the portion of such Liabilities for which
such Underwriter is responsible. No person guilty of a fraudulent
misrepresentation (within the meaning of section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. As used in this Section 7, the term "Company" shall include
any officer, director or person who controls the Company within the meaning of
section 15 of the Act. The Underwriters' obligations under this Section 7 to
contribute are several in proportion to their respective underwriting
obligations and not joint. If the full amount of the contribution specified in
this Section 7 is not permitted by law, then each indemnified party and each
person who controls an indemnified party shall be entitled to contribution from
each indemnifying party to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under section 11 of the Act other than the Company
and Underwriters. No contribution shall be requested with regard to the
- 25 -
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. COSTS AND EXPENSES.
(A) CERTAIN COSTS AND EXPENSES. Whether or not this Agreement
becomes effective or the sale of the Shares to the Underwriters is consummated,
the Company shall pay all costs and expenses incident to the issuance, offering,
sale and delivery of the Shares and the performance of its obligations under
this Agreement, including without limitation: (i) all fees and expenses of the
Company's legal counsel and accountants; (ii) all costs and expenses incident to
the preparation, printing, filing and distribution of the Registration Statement
(including the financial statements contained therein and all exhibits and
amendments thereto), each Preliminary Prospectus and the Prospectus, each as
amended or supplemented, this Agreement and the other agreements and documents
referred to herein, each in such quantities as you shall deem necessary; (iii)
all fees of NASD required in connection with the filing required by NASD to be
made by the Representative with respect to the Offering; (iv) all expenses,
including fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of Representative's Counsel in connection with the qualification
of the Securities under the "blue sky" laws which you shall designate; (v) all
costs and expenses of printing the respective certificates representing the
Shares; (vi) the expense of placing one or more "tombstone" advertisements or
promotional materials as directed by you (provided, however, that the aggregate
amount thereof shall not exceed $10,000); (vii) all costs and expenses of the
Company and its employees (but not of the Representative or its employees)
associated with due diligence meetings and presentations; (viii) all costs and
expenses associated with the preparation of a seven to ten minute professional
video presentation concerning the Company, its products and its management for
broker due diligence purposes; (ix) any and all taxes (including without
limitation any transfer, franchise, capital stock or other tax imposed by any
jurisdiction) on sales of the Shares to the Underwriters hereunder; and (x) all
costs and expenses incident to the furnishing of any amended Prospectus or any
supplement to be attached to the Prospectus as required by Sections 3(a) and
3(d), except as otherwise provided by said Sections.
(B) REPRESENTATIVE'S EXPENSE ALLOWANCE. In addition to the
expenses described in Section 8(a), the Company shall on the First Closing Date
pay to you, based on the number of Firm Shares to be sold by the Company and
each SELLING SHAREHOLDER, the balance of a non-accountable expense allowance
(which shall include fees of Representative's Counsel exclusive of the fees
referred to in Section 3(b)) of $157,500 (that being an amount equal to 2.5
percent of the gross proceeds received upon sale of the Firm Shares), of which
$20,000 has been paid to you prior to the date hereof. In the event that the
Over-Allotment Option is exercised, then the Company shall on the Option Closing
Date pay to you, based on the number of Option Shares to be sold by the Company,
an additional amount equal to 2.5 percent of the gross proceeds received upon
sale of any of the Option Shares. In the event that the transactions
contemplated hereby fail to be consummated for any reason, then
- 26 -
you shall return to the Company that portion of the $20,000 heretofore paid by
the Company to the extent that it has not been utilized by you in connection
with the Offering for accountable out-of-pocket expenses; provided, however,
that if such failure is due to a breach by the Company of any covenant,
representation or warranty contained herein or because any other condition to
the Underwriters' obligations hereunder required to be fulfilled by the Company
is not fulfilled, then the Company shall be liable for your accountable
out-of-pocket expenses to the full extent thereof (with credit given to the
$20,000 paid).
(C) NO FINDERS. No person is entitled either directly or
indirectly to compensation from the Company, the Underwriters or any other
person for services as a finder in connection with the Offering, and the Company
hereby indemnifies and holds harmless the Underwriters, and the Underwriters
hereby indemnify and hold harmless the Company from and against all Liabilities,
joint or several, to which the indemnified party may become subject insofar as
such Liabilities arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the Offering by reason of such
person's or entity's influence or prior contact with the indemnifying party. The
Representative may compensate any of its personnel as it shall determine in its
sole discretion.
9. SUBSTITUTION OF UNDERWRITERS.
(A) SUBSTITUTION. If any Underwriter defaults in its obligation
to purchase the numbers of Shares which it has agreed to purchase under this
Agreement, you shall be obligated to purchase all of the Shares not purchased by
the defaulting Underwriter unless such purchase shall cause you to be in
violation of the net capital requirements of Rule 15c3- 1 of the Exchange Act,
in which case you, and any other Underwriters satisfactory to you who so agree,
shall have the right, but shall not be obligated, to purchase (in such
proportions as may be agreed upon among them) all of the Shares. If you or the
other Underwriters satisfactory to you do not elect to purchase the Shares which
the defaulting Underwriter or Underwriters agreed but failed to purchase, then
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company, except for (i) the payment by the
Company of expenses as provided by Section 8(a), (ii) the payment by the Company
of accountable expenses as provided by Section 8(b), and (iii) the indemnity and
contribution agreements of the Company and the Underwriters provided by Sections
6 and 7.
(B) FURTHER MATTERS. Nothing contained herein shall relieve a
defaulting Underwriter of any liability it may have for damages caused by its
default. If the other Underwriters satisfactory to you are obligated or agree to
purchase the Shares of a defaulting Underwriter, either you or the Company may
postpone the First Closing Date for up to seven banking days in order to effect
any changes that may be necessary in the Registration Statement, any Preliminary
Prospectus or the Prospectus or in any other document or agreement, and to file
promptly any amendments to the Registration Statement, or any
- 27 -
amendments or supplements to any Preliminary Prospectus or the Prospectus, which
in your opinion may thereby be made necessary.
10. EFFECTIVE DATE. The Agreement shall become effective upon
its execution, except that you may, at your option, delay its effectiveness
until 10:00 a.m., New York time, on the first full business day following the
Effective Date, or at such earlier time after the Effective Date as you in your
discretion shall first commence the initial public Offering by the Underwriters
of any of the Shares. The time of the initial public offering shall mean the
time of release by you of the first newspaper advertisement with respect to the
Shares, or the time when the Shares are first generally offered by you to
dealers by letter or telegram, whichever shall first occur. This Agreement may
be terminated by you at any time before it becomes effective as provided above,
except that the provisions of Sections 6, 7, 8, 13, 14, 15 and 16 shall remain
in effect notwithstanding such termination.
11. TERMINATION.
(A) GROUNDS FOR TERMINATION. This Agreement, except for Sections
6, 7, 8, 13, 14, 15 and 16, may be terminated at any time prior to the First
Closing Date, and the Over-Allotment Option, if exercised, may be cancelled at
any time prior to the Option Closing Date, by you if in your sole judgment it is
impracticable to offer for sale or to enforce contracts made by the Underwriters
for the resale of the Shares agreed to be purchased hereunder, by reason of: (i)
the Company having sustained a material loss, whether or not insured, by reason
of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally which are not in force and effect on
the date hereof; (iv) a banking moratorium having been declared by federal or
New York State authorities; (v) an outbreak or significant escalation of major
international hostilities or other national or international calamity having
occurred; (vi) the passage by the Congress of the United States or by any state
legislature, of any act or measure, or the adoption of any order, rule or
regulation by any governmental body or any authoritative accounting institute or
board, or any governmental executive, which is reasonably believed by you likely
to have a material adverse effect on the business, property, operations,
condition (financial or otherwise) or earnings of the Company; (vii) any
material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement; or (viii) any material adverse change having occurred since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the business, property, operations, condition (financial or
otherwise), earnings or business prospects of the Company, whether or not
arising in the ordinary course of business.
(B) NOTIFICATION. If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided by this Section 11
or by Section 10, the
- 28 -
Company shall be promptly notified by you, by telephone or telegram, and
confirmed by letter.
12. REPRESENTATIVE'S WARRANT. On the First Closing Date, the Company
shall issue and sell to you, for a total purchase price of $5.00, and upon the
terms and conditions set forth in the form of Representative's Warrant filed as
an exhibit to the Registration Statement, a warrant entitling you to purchase
90,000 Shares (the "Representative's Warrant"). In the event of conflict in the
terms of this Agreement and the Representative's Warrant, the terms and
conditions of the Representative's Warrant shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company and the Underwriters set forth in or made
pursuant to this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of any other party, and shall survive
delivery of and payment for the Shares and the termination of this Agreement.
The Company hereby indemnifies and holds harmless the Underwriters from and
against all Liabilities, joint or several, to which the Underwriters may become
subject insofar as such Liabilities arise out of or are based upon the breach or
failure of any representation, warranty or covenant of the Company contained in
this Agreement.
14. NOTICES. All communications hereunder shall be in writing and,
except as otherwise expressly provided herein, if sent to you, shall be mailed,
delivered or telegraphed and confirmed to you at H.J. Meyers & Co., Inc., 1895
Mt. Hope Avenue, Rochester, New York 14620, with a copy sent to James M.
Jenkins, Esq., Harter, Secrest & Emery, 700 Midtown Tower, Rochester, New York
14604; or if sent to the Company, shall be mailed, delivered, or telegraphed and
confirmed to it at General Bearing Corporation, 44 High Street, West Nyack, New
York, 10994, with a copy sent to Steven L. Wasserman, Esq., Reid & Priest,
L.L.P., 40 West 57th Street, New York, New York, 10019.
15. PARTIES IN INTEREST. This Agreement is made solely for the benefit
of the Underwriters, the Company, and to the extent expressed, any person
controlling the Company or an Underwriter, as the case may be, and the directors
of the Company, nominees for directors of the Company (if any) named in the
Prospectus, officers of the Company who have signed the Registration Statement,
and their respective executors, administrators, successors and assigns; and no
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser, as
such, from an Underwriter of the Shares.
16. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York applicable to agreements
made and to be performed entirely within such State, without reference to such
State's principals regarding the conflict of laws.
- 29 -
17. COUNTERPARTS. This Agreement may be executed in two or more
counterpart copies, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Yours very truly,
GENERAL BEARING CORPORATION
By:________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
H.J. MEYERS & CO., INC.
AS REPRESENTATIVE OF THE
SEVERAL UNDERWRITERS NAMED
IN SCHEDULE I HERETO
By:____________________________
Name:
Title:
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SCHEDULE I
UNDERWRITING AGREEMENT DATED [EFFECTIVE DATE]
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
H.J. Meyers & Co., Inc.
TOTAL --------
900,000
- 31 -
REPRESENTATIVE'S WARRANT
Dated: February 1997
THIS CERTIFIES THAT H.J. MEYERS & CO., INC. (herein sometimes called
the "Holder") is entitled to purchase from GENERAL BEARING CORPORATION, a
Delaware corporation (the "Company"), at the respective prices and during the
period hereinafter specified, up to 90,000 shares of the Common Stock, $.01 par
value, of the Company (the "Common Stock"). This Representative's Warrant (this
"Warrant") is issued pursuant to an Underwriting Agreement dated __________,
1997 between the Company and H.J. Meyers & Co., Inc. (the "Representative"), as
representative of certain underwriters, including itself (the "Underwriters"),
in connection with a public offering, through the Underwriters (the "Offering"),
of 900,000 shares of Common Stock (and up to 135,000 additional shares of Common
Stock covered by an over-allotment option granted to the Underwriters), in
consideration of $5.00 received by the Company for this Warrant. Except as
otherwise expressly provided herein, the shares of Common Stock issued upon
exercise of this Warrant shall bear the same terms and conditions described
under the caption "Description Of Securities" in the registration statement
(File No. 333-15477) on Form S-1 relating to the Offering (the "Registration
Statement"), except that (i) the Holder shall have registration rights under the
Securities Act of 1933, as amended (the "Act"), for this Warrant and the Common
Stock as more fully described in Section 6. Each certificate evidencing the
Registrable Securities (as hereinafter defined) shall bear the appropriate
restrictive legend set forth below, except that any such certificate shall not
bear such restrictive legend if (a) it is transferred pursuant to an effective
registration statement under the Act or in compliance with Rule 144 or Rule 144A
promulgated under the Act, or (b) the Company is provided with an opinion of
counsel to the effect that such legend is not required in order to establish
compliance with the provisions of the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
COPIES OF THE REPRESENTATIVE'S WARRANT COVERING REGISTRATION RIGHTS
PERTAINING TO THESE SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE OFFICE OF THE
COMPANY AT WEST NYACK, NEW YORK."
Unless the context otherwise requires, all references herein to a "Section"
shall mean the appropriate Section of this Warrant.
1. EXERCISE PRICE AND PERIOD. The rights represented by this War-
rant shall be exercised at the price and during the periods set forth below:
(a) During the period from [EFFECTIVE DATE] to [EFFECTIVE
DATE+1 YEAR-1 DAY] (the "First Anniversary Date") inclusive, the Holder shall
have no right to purchase any Securities hereunder, except that in the event of
any merger or consolidation of the Company into another entity, or any sale of
substantially all of the assets of the Company as an entirety, prior to the
First Anniversary Date, the Holder shall have the right to exercise this Warrant
at such tie and into such kinds and amounts of shares of stock and other
securities and property (including cash) as would be receivable by a holder of
the number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto.
(b) Between [EFFECTIVE DATE+1 YEAR] and [EFFECTIVE DATE+5
YEARS-1 DAY] (the "Expiration Date") inclusive, the Holder shall have the right
to purchase hereunder: (i) shares of Common Stock at a price of $9.80 per share
(that being 140 percent of the public offering price of the shares of Common
Stock) (the "Share Exercise Price").
(c) Notwithstanding the provisions of Section 1(b) with
respect to the Exercise Price to the contrary, the Holder may elect to exercise
this Warrant, in whole or in part, by receiving Common Stock equal to the value
(as herein determined) of the portion of this Warrant then being exercised, in
which event the Company shall issue to the Holder the number of shares of Common
Stock determined by using the following formula:
X = Y(A-B)
------
A
X = the number of shares of Common Stock to be issued to the
Holder under the provisions of this Section 1(c)
Y = the number of shares of Common Stock that would
otherwise be issued upon such exercise
A = the Current Fair Market Value (as hereinafter defined)
of one share of Common Stock calculated as of the last
trading day immediately preceding such exercise
B = the Exercise Price
As used herein, the "Current Fair Market Value" of the Common Stock as of a
specified date shall mean with respect to each share of Common Stock, (i) the
average of the closing prices of the Common Stock sold on all securities
exchanges on which the Common Stock may at the time be listed, or (ii) if there
have been no sales on any such exchange on such day, the
-2-
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or (iii) if on such day the Common Stock is not so listed, the
average of the representative bid and asked prices quoted in the NASDAQ System
as of 4:00 p.m., New York time, or (iv) if on such day the Common Stock is not
quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated or any similar successor organization,
in each such case either (i) calculated ont eh date which the form of election
specified in Section 2 herein is deemed to have been sent to the Company or (ii)
averaged over a period of 5 days consisting of the day as of which the Current
Fair Market Value is being determined and the 4 consecutive business days prior
to such day. The Holder hereof shall determine in its sole discretion which
method of calculation to use. If on the date of which Current Fair Market Value
is to be determined the Common Stock is not listed on any securities exchange or
quoted in the NASDAQ System or the over-the-counter market, then Current Fair
Market Value of the Common Stock shall be the highest price per share which the
Company could then obtain from a willing buyer (not a current employee or
director) for Common Stock sold by the Company from authorized but unissued
shares, as determined in good faith by the Board of Directors of the Company,
unless prior to such date the Company has become subject to a merger,
consolidation, reorganization, acquisition or other similar transaction pursuant
to which the Company is not the surviving entity, in which case the Current Fair
Market Value of the Common Stock shall be deemed to be the per share value
received or to be received in such transaction by the holders of Common Stock.
(d) After the Expiration Date, the Holder shall have no right
to purchase any shares of Common Stock hereunder.
2. EXERCISE. The rights represented by this Warrant may be exercised,
in whole or in part (with respect to shares of Common Stock, by the Holder at
any time within the periods specified in Section 1 by: (a) surrender of this
Warrant for cancellation (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or at such other
office or agency of the Company as it may designate by notice in writing to the
Holder at the address of the Holder appearing on the books of the Company); (b)
to the extent that the Holder does not use the election provided by Section
1(c), payment to the Company of the Exercise Price for the number of shares of
Common Stock specified in the such purchase form, together with the amount of
applicable stock transfer taxes, if any; and (c) delivery to the Company of a
duly executed agreement signed by the person(s) designated in the purchase form
to the effect that such person(s) agree(s) to be bound by all of the terms and
conditions of this Warrant, including without limitation the provisions of
Section 6 and 7. This Warrant shall be deemed to have been exercised, in whole
or in part to the extent specified immediately prior to the close of business on
the date on which all of the provisions of this Section 2 are satisfied, and the
person(s) designated in the purchase form shall become the holder(s) of record
of the shares of Common Stock issuable upon such exercise at that time and date.
The certificates representing the shares of Common Stock so purchased shall be
delivered to the Holder within a reasonable time, not exceeding ten business
days, after this Warrant shall have been so exercised.
-3-
3. TRANSFER OF WARRANT.
(a) During the period from [EFFECTIVE DATE] to the First
Anniversary Date inclusive, this Warrant shall not be transferred, sold,
assigned or hypothecated, except that during such period this Warrant may be
transferred (i) to successors in interest of the Holder, or (ii) in whole or in
part to any one or more directors or officers of the Holder, in each case
subject to compliance with applicable Federal and state securities laws and
Interpretations of the Board of Governors of the National Association of
Securities Dealers, Inc.
(b) Between [EFFECTIVE DATE+1 YEAR] and the Expiration Date
inclusive, this Warrant shall be freely transferable, in whole or in part,
subject to the other terms and conditions hereof and to compliance with
applicable Federal and state securities laws; provided, however, that this
Warrant shall be immediately exercised upon any such transfer to any person or
entity that is not a shareholder, director or officer of the Holder and that if
this Warrant is not so exercised upon a transfer to any person or entity which
is not a shareholder, director or officer of the Holder, that this Warrant shall
immediately lapse.
(c) Any transfer of this Warrant permitted by this Section 3
shall be effected by: (i) surrender of this Warrant for cancellation (with the
assignment form at the end hereof properly executed) at the office or agency of
the Company referred to in Section 2; (ii) delivery of a certificate (signed, if
the Holder is a corporation or partnership, by an authorized officer or partner
thereof), stating that each transferee designated in the assignment form is a
permitted transferee under this Section 3; and (iii) delivery of an opinion of
counsel stating that the proposed transfer may be made without registration or
qualification under applicable Federal or state securities laws. This Warrant
shall be deemed to have been transferred, in whole or in part to the extent
specified, immediately prior to the close of business on the date the provisions
of this Section 3(c) are satisfied, and the transferee(s) designated in the
assignment form shall become the holder(s) of record at that time and date. The
Company shall issue, in the name(s) of the designated transferee(s) (including
the Holder if this Warrant has been transferred in part) a new Warrant or
Warrants of like tenor and representing, in the aggregate, rights to purchase
the same number of shares of Common Stock as are then purchasable under this
Warrant. Such new Warrant or Warrants shall be delivered to the record holder(s)
thereof within a reasonable time, not exceeding ten business days, after the
rights represented by this Warrant shall have been so transferred. As used
herein (unless the context otherwise requires), the term "Holder" shall include
each such transferee, and the term "Warrant" shall include each such transferred
Warrant.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
shares of Common Stock which may be issued upon exercise of this Warrant shall,
upon issuance in accordance with the terms hereof, be duly and validly issued,
fully paid and non-assessable, with no personal liability attaching to the
Holder thereof. The Company further covenants and agrees that during the period
within which this Warrant may be exercised, the Company shall at all times have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of this Warrant.
-4-
5. SHAREHOLDER'S RIGHTS. This Warrant shall not entitle the Holder
to any voting rights or other rights as a shareholder of the Company.
6. REGISTRATION RIGHTS.
(A) CERTAIN DEFINITIONS. As used herein, the term:
(i) "Registrable Securities" shall mean this Warrant and/or
the shares of Common Stock issued or issuable upon exercise of this Warrant, as
the same shall be so designated by the Holder.
(ii) "50% Holder" shall mean the Holder(s) of at least 50
percent of the total number of shares of Common Stock comprising the Registrable
Securities (whether or not this Warrant has been exercised), and shall include
any Holder or combination of Holders.
(B) "PIGGYBACK" REGISTRATION. From the date hereof until the
Expiration Date, the Company shall advise the Holder, whether the Holder holds
this Warrant or has exercised this Warrant and holds any of the Common Stock, by
written notice at least four weeks prior to the filing of any post-effective
amendment to the Registration Statement (unless the Company determines that to
comply with Federal securities law it must file such post-effective amendment in
less than four weeks' time, in which case the Company shall give the Holder the
most notice practicable under the circumstances), or of any new registration
statement or post-effective amendment thereto under the Act (other than a
registration statement on Form S-8 or its counterpart), or any Notification on
Form 1-A under the Act, covering any securities of the Company, whether for its
own account or for the account of others, and shall, upon the request of the
Holder, include in any such post-effective amendment or new registration
statement such information as may be required to permit a public offering of any
or all of the Registrable Securities of the Holder, all at no expense whatsoever
to the Holder (except in the case of any post-effective amendment to the extent
as permitted by the Act or the rules and regulations promulgated thereunder),
except that each Holder whose Registrable Securities are included in such
registration shall bear the fees of its own counsel and any underwriting
discounts or commissions applicable to the Securities sold by it.
(C) DEMAND REGISTRATION.
(i) If any 50% Holder shall give notice to the Company, at
any time after the First Anniversary Date and prior to the Expiration Date, to
the effect that such 50% Holder desires to register under the Act any
Registrable Securities under such circumstances that a public distribution
(within the meaning of the Act) of any such securities shall be involved, then
the Company shall promptly, but no later than 30 days after receipt of such
notice, use its reasonable best efforts to file a post-effective amendment to
the Registration Statement or a new registration statement under the Act, to the
end that Registrable Securities of such 50% Holder may be publicly sold under
the Act as promptly as practicable thereafter, and the Company shall use its
best efforts to cause such registration to become effective as soon as possible;
provided, however, that such 50% Holder shall furnish the Company
-5-
with appropriate information in connection therewith as the Company may
reasonably request in writing; and provided further that the Company shall then
have available current financial statements (unless the unavailability of
current financial statements results from the Company's fault or neglect). The
50% Holder may, at its option, cause Registrable Securities to be included in
such registration under this Section 6(c) on a maximum of two occasions during
the four-year period beginning on the First Anniversary Date and ending on the
Expiration Date.
(ii) Within ten days after receiving any such notice
pursuant to this Section 6(c), the Company shall give notice to each other
Holder (whether such Holder holds a Warrant or has exercised the Warrant and
holds any of the Securities), advising that the Company is proceeding with such
post-effective amendment or new registration statement and offering to include
therein Registrable Securities held by such other Holders, provided that they
shall furnish the Company with such appropriate information in connection
therewith as the Company shall reasonably request in writing.
(iii) All costs and expenses (including without limitation,
legal, accounting, printing, mailing and filing fees) of the first such
registration effected under this Section 6(c) shall be borne by the Company,
except that the Holder(s) whose Registrable Securities are included in such
registration shall bear the fees of their own counsel and any underwriting
discounts or commissions applicable to the securities sold by them. All costs
and expenses of the second such registration effected under this Section 6(c)
shall be borne by the Holder(s) whose Registrable Securities are included in
such registration.
(iv) The Company shall cause each registration statement or
post- effective amendment filed pursuant to this Section 6(c) to remain current
under the Act (including the taking of such steps as are necessary to obtain the
removal of any stop order) for a period of at least six months (and for up to an
additional three months if requested by the Holder(s)) from the effective date
thereof, or until all the Registrable Securities included in such registration
have been sold, whichever is earlier.
(D) FURTHER RIGHTS. The registration rights provided by this
Section 6 may be exercised by the Holder either prior or subsequent to its
exercise of this Warrant. A 50% Holder may, at its option, request registration
pursuant to Section 6(b) and/or pursuant to Section 6(c), and its request for
registration under one such Section shall not affect its right to request
registration under the other. The registration rights provided by this Section 6
shall supersede and be prior in right to any registration rights granted by the
Company to other holders of its outstanding securities.
(E) FURTHER OBLIGATIONS OF COMPANY. With respect to all
registrations under this Section 6, the Company shall: (i) supply prospectuses
and such other documents as the Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities;
(ii) use its best efforts to register and qualify the Registrable Securities for
sale in such states as the Holder designates (provided, however, that in no
event shall the Company be required to qualify as a foreign corporation or a
dealer in securities or to execute a general consent to service of process); and
(iii) do any and all other
-6-
acts and things which may be necessary or desirable to enable the Holder to
consummate the public sale or other disposition of the Registrable Securities.
7. INDEMNIFICATION.
(A) INDEMNIFICATION BY THE COMPANY. As used in this Section 7,
the term "Liabilities" shall mean any and all losses, claims, damages and
liabilities, and actions and proceedings in respect thereof, including without
limitation all reasonable costs of defense and investigation and all attorneys'
fees. Whenever pursuant to Section 6 a registration statement relating to any
Registrable Securities is filed under the Act, or amended or supplemented, the
Company shall indemnify and hold harmless each Holder of Registrable Securities
included in such registration statement, amendment or supplement (each, a
"Distributing Holder"), and each person (if any) who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such Registrable Securities, and each person (if any) who
controls (within the meaning of the Act) any such underwriter, from and against
all Liabilities, joint or several, to which the Distributing Holder or any such
controlling person or underwriter may become subject, under the Act or
otherwise, insofar as such Liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any such
registration statement, or any preliminary prospectus or final prospectus
constituting a part thereof, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company shall not be liable
in any such case to the extent that any such Liabilities arise out of or are
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, preliminary prospectus,
final prospectus, or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished by such Distributing Holder or by
any other Distributing Holder for use in the preparation thereof. The foregoing
indemnity shall be in addition to any other liability which the Company may
otherwise have.
(B) INDEMNIFICATION BY HOLDER. The Distributing Holder(s) shall
indemnify and hold harmless the Company, and each of its directors, each nominee
(if any) named in any preliminary prospectus or final prospectus constituting a
part of such registration statement, each of its officers who have signed such
registration statement and such amendments or supplements thereto, and each
person (if any) who controls the Company (within the meaning of the Act) against
all Liabilities, joint or several, to which the Company or any such director,
nominee, officer or controlling person may become subject, under the Act or
otherwise, insofar as such Liabilities arise out of or are based upon any untrue
or alleged untrue statement of any material fact contained in such registration
statement, preliminary prospectus, final prospectus, or amendment or supplement
thereto, or arise out of or are based upon he omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent that such Liabilities arise out of or are based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon and in conformity with written
information furnished by such Distributing
-7-
Holder(s) for use in the preparation thereof. The foregoing indemnity shall be
in addition to any other liability which the Distributing Holder(s) may
otherwise have.
(C) PROCEDURE. Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party, give the indemnifying party notice of the commencement
thereof; but the omission so to notify the indemnifying party shall not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 7. In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party shall not be entitled to participate in and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall be liable to such indemnified party under this Section
7 for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation.
(D) LIMITATION. Notwithstanding the foregoing, if the
Registrable Securities are to be distributed by means of an underwritten public
offering, to the extent that the provisions on indemnification and contribution
contained in the underwriting agreement entered into in connection with such
underwriting are in conflict with the provisions of this Section 7, the
provisions of such underwriting agreement shall be controlling, provided that
the Holder is a party to such underwriting agreement.
8. ANTI-DILUTION. In the event that the outstanding shares of Com-
mon Stock are at any time increased or decreased in number, or changed into or
exchanged for a different number or kind of shares or other security of the
Company or of another corporation through reorganization, merger, consolidation,
liquidation, recapitalization or, in the case of Common Stock, stock split,
reverse split, combination of shares or stock dividends payable with respect to
such Common Stock, sold at below the exercise price of this Warrant, and for
other unusual events (other than employee benefit and stock option plans for
employees and advisors of the Company) appropriate adjustments shall be made in
the number and kind of such securities then subject to this Warrant and in the
Exercise Price of this Warrant effective as of the date of such occurrence, so
that the position of the Holder upon exercise of this Warrant shall be the same
as it would have been had it owned immediately prior to the occurrence of such
event the Common Stock subject to this Warrant; provided, however, that in no
event shall two adjustments be made for the same event. For example, if the
Company declares a 2-for-1 stock dividend or stock split, then the number of
shares of Common Stock then subject to this Warrant shall each be doubled and
the Share Exercise Price shall each be reduced by 50 percent. Such adjustments
shall be made successively whenever any event described by this Section 8 shall
occur.
9. GOVERNING LAW. This Warrant shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely within such State, without reference to
such State's laws regarding the conflict of laws.
-8-
10. AMENDMENT OR WAIVER. Any provision of this Warrant may be amended,
waived or modified upon the written consent of the Company and any 50% Holder;
provided, however, that such amendment, waiver or modification applies by its
terms to each Holder; and provided further, that a Holder may waive any of its
rights or the Company's obligations to such Holder without obtaining the consent
of any other Holder.
IN WITNESS WHEREOF, GENERAL BEARING CORPORATION has caused this Warrant
to be signed by its duly authorized officers under its corporate seal and to be
dated as of the date set forth on the first page hereof.
GENERAL BEARING CORPORATION
By:______________________________
Name:
Title:
(Corporate Seal)
Attest:
- -------------------------
Secretary
-9-
PURCHASE FORM
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the Holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase rights represented by such Warrant
for, and to purchase thereunder, _________ shares of Common Stock, $.01 par
value, of GENERAL BEARING CORPORATION (the "Company") and (i) herewith makes
payment of an aggregate of $_______________ therefor and/or (ii) pursuant to
Section 1(c) of such Warrant hereby tenders the right to exercise such Warrant
to the extent of _______ shares of Common Stock of the Company. The undersigned
requests that the certificates for the shares of such Common Stock be issued in
the name(s) of, and delivered to, the person(s) whose name(s) and address(es)
are set forth below:
Dated: ____________________
----------------------------
Name:
----------------------------
Address:
Signatures guaranteed by:
- ------------------------------
Taxpayer Identification Number:
- -------------------------------
-10-
TRANSFER FORM
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto _______________________________________ the right to purchase
shares of the Common Stock, $.01 par value per share, of GENERAL BEARING
CORPORATION (the "Company") represented by the foregoing Warrant to the extent
of ____ shares of Common Stock and appoints ____________________________
attorney to transfer such rights on the books of the Company, with full power of
substitution in the premises.
Dated: ____________________
----------------------------
Name:
----------------------------
Address:
Signatures guaranteed by:
- ------------------------------
Taxpayer Identification Number:
- -------------------------------
-11-
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
We hereby consent to the use in the Prospectus constituting a part of
this Amendment No. 1 to the Registration Statement of our report dated March 24,
1995, relating to the consolidated financial statements of General Bearing
Corporation and Subsidiaries, which is contained in that Prospectus, and of our
report dated March 26, 1995 relating to the schedule, which is contained in Part
II of the Registration Statement.
We also consent to the reference to us under the captions "Experts",
"Selected Financial Data", and "Change in Independent Auditors" in the
Prospectus.
/s/ Ferro, Berdon & Company, L.L.P.
- -----------------------------------
FERRO BERDON & COMPANY, L.L.P.
New York, NY
February 6, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated September 13, 1996, except for
Note 15(a) which is as of October 10, 1996 relating to the consolidated
financial statements of General Bearing Corporation and Subsidiaries, which is
contained in that Prospectus, and of our report dated September 13, 1996,
relating to the schedule, which is contained in Part II of the Registration
Statement.
We also consent to the reference to us under the captions "Experts",
"Selected Financial Data", and "Change in Independent Auditors" in the
Prospectus.
/s/ BDO Seidman, LLP
--------------------
BDO SEIDMAN, LLP
New York, NY
February 3, 1997
