UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 27, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from .................. to ....................
Commission file Number 0-22053
GENERAL BEARING CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-2796245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 High Street, West Nyack, New York 10994
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
At March 20, 1998 the aggregate market value of the Registrant's outstanding
common stock, $.01 par value per share, held by non-affiliates, was $12,076,956,
based on the closing sale price as reported March 20, 1998 on the NASDAQ Small
Cap Market.
At March 20, 1998, the Registrant had issued and outstanding 3,911,950 shares of
common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
None of the documents indicated on Form 10-K have been incorporated herein
by reference.
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CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
FOR THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements, which are statements other than those of
historical fact, including, without limitation, ones identified by the use of
the words "anticipates,: "estimates," "expects," "intends," "plans," "predicts,"
and similar expressions. In this Annual Report such statements may relate to the
recoverability of deferred taxes, likely industry trends, the continued
availability of credit lines, the suitability of facilities, access to suppliers
and implementation of joint ventures and marketing programs. Such forward
looking statements involve important risks and uncertainties that could cause
actual results to differ materially from those expected by the Company, and such
statements should be read along with the cautionary statements accompanying them
and mindful of the following additional risks and uncertainties possibly
affecting the Company: the possibility of a general economic downturn, which is
likely to have an important impact on historically cyclical industries such as
manufacturing; significant price, quality or marketing efforts from domestic or
overseas competitors; the loss of, or substantial reduction in orders from, a
major customer; the loss of, or failure to attain additional quality
certifications; changes in U.S. or foreign government regulations and policies,
including the imposition of antidumping orders on the Company or any of its
suppliers; a significant judgment or order against the Company in a legal or
administrative proceeding; and potential delays in implementing planned sales
and marketing expansion efforts and the failure of their effectiveness upon
implementation.
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GENERAL BEARING CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Result of Operations..................... 12
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 49
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 54
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PART I
Item 1. Business.
General Bearing Corporation ("Company") manufactures, sources, assembles
and distributes a variety of bearing components and bearing products, including
ball bearings, tapered roller bearings, spherical roller bearings and
cylindrical roller bearings under the Hyatt(R) and The General(R) trademarks.
The Company supplies original equipment manufacturers ("OEMs") and the
industrial aftermarket principally in the United States ("U.S.") and Canada. The
Company's products are used in a broad range of applications, including
automobiles, railroad cars, locomotives, trucks, office equipment, machinery and
appliances.
The Company operates in two divisions: the OEM Division, which supplies
OEMs, and the Distribution Division, which serves distributors that supply the
repair and maintenance aftermarket and small OEMs. Current OEM Division
customers include automotive and locomotive divisions of General Motors
Corporation ("GM"), Gunite Corporation ("Gunite"), Strick Corporation
("Strick"), Trinity Industries, Inc. ("Trinity"), Burlington Northern Railroad
Co. ("Burlington Northern") and Xerox Corporation ("Xerox"). The Distribution
Division has customers ranging in size from Motion Industries Inc. ("Motion
Industries") and Applied Industrial Technology, each of which has more than 400
outlets, to independent single outlet operations. The Distribution Division's
individual shipments are typically smaller in volume but have higher gross
margins.
Through flexibility in manufacturing and sourcing, as well as attentive
customer service, the Company strives to be a reliable, innovative and cost
effective provider of bearing components and products to the approximately $5
billion per year U.S. bearing market. The Company's strategy to accomplish this
objective includes the following:
* PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE. The Company
maintains a detailed and extensive Quality Assurance Program and has been
certified to the M 1003 standard by the Association of American Railroads
("AAR") and the MIL-I-45208 standard by General Dynamics, a military
contractor. The Company recently has obtained 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 railroad cars. In addition, the Company has been qualified as
an authorized supplier by leading automobile and truck trailer
manufacturers (including GM, Ford, Fruehauf, Gunite, Stoughton Trailers,
Inc., and Strick), railroads (including Burlington Northern, the Atchison,
Topeka and Santa Fe Railway, Missouri Pacific Railroad Company, Southern
Pacific Rail Corporation and Norfolk Southern Corp.) and national
distributors of bearings, including Motion Industries and Applied
Industrial Technology 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.
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* PRESENCE IN CHINA. In 1987, the Company formed a joint venture, Shanghai
General Bearing Co. Ltd. ("SGBC"), in the People's Republic of China
("PRC") to establish a low cost, quality controlled source for bearings
and bearing components. The Company has formed other joint ventures in the
PRC, and it continues to investigate joint venture opportunities. The
Company believes that potential customers in the U.S. intending to
establish or expand manufacturing and other facilities in the PRC have,
and will continue to have, an incentive to purchase bearings from the
Company in order to satisfy Chinese counterpurchasing and local content
requirements. In addition, on February 3, 1997, the U.S. Department of
Commerce ("Commerce") granted the Company's joint venture, SGBC, partial
revocation of the antidumping order affecting tapered roller bearings from
the PRC. As a result of SGBC receiving zero or de minimis antidumping
margins for the periods from 1990-1993 ("4th, 5th and 6th Reviews"),
Commerce revoked the antidumping order as to SGBC in the 1993-1994 period
("7th Review"). As a result of the revocation, SGBC and the Company will
no longer be required to participate in the annual reviews of the
antidumping order conducted by Commerce. However, The Timken Company, the
leading manufacturer and distributor in the United States of bearing
components and products, has filed actions against the United States in
the Court of International Trade challenging Commerce's final antidumping
determinations of the 4th, 5th, 6th, 7th and 8th Reviews. The Company
believes its revocation provides it with a competitive advantage. See
Legal Proceedings.
* 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.
PRODUCTS
The Company and its joint ventures manufacture and market high quality,
precision ball and roller bearings used in a broad range of applications
including automotive and trucking (e.g., steering columns, wheels and axles),
railcar and locomotive (e.g., wheel and axle assemblies), appliances (e.g., fans
and vacuum cleaners), lawn and garden implements (e.g., lawn mowers), office
equipment (e.g., copiers, mailing machines), 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).
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The Company sells approximately 1,500 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. Under the "Hyatt"(R) brand the
Company produces selected tapered roller bearings, spherical roller bearings and
cylindrical roller bearings which are used in railroad, truck trailer,
automotive and other industrial applications.
MANUFACTURING AND SOURCING
The Company primarily manufactures and assembles bearings at its
facilities in New York and at the Company's joint venture facility, SGBC, in
Shanghai, PRC. Certain imports from various locations have been subject to
antidumping duties since 1987, requiring importing companies to post cash
deposits. TRB's imported from SGBC, the Company's Chinese joint venture and
principal source of imported product, have not been subject to antidumping
duties since 1991.
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 three joint ventures with manufacturers in
the PRC to enable it to secure a reliable source of high quality low cost
bearings and bearing components. In addition, World Machinery Company ("World"),
which owns approximately 76.9% of the Company's common stock, has entered into
two additional joint ventures with a Chinese bearing manufacturer and the
Company has arrangements with such joint ventures. 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 may not be required to incur inventory carrying
costs, since the joint ventures may hold all inventory until needed by the
Company. The joint ventures also provide a far less capital intensive
alternative to building Company-owned facilities.
SGBC was established by the Company and Shanghai Roller Bearing Factory
("SRBF") in June 1987 as a joint venture limited liability company in accordance
with PRC law for an initial term of ten years, which was recently extended to
June 2008. SGBC produces tapered roller and ball bearings, which the Company
imports into the U.S. for further assembly, inspection, testing and
distribution. The
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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.
The Company has the exclusive right to sell the products of SGBC in the
U.S. In 1995, 1996 and 1997, the Company imported $5,500,000, $5,800,000 and
$5,800,000 respectively, in bearings from SGBC. Purchases are made upon terms
and conditions established periodically by negotiation between the Company and
SGBC. 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.
Shanghai Pudong General Bearing Company ("SPGBC"), a joint venture between
General Bearing Corporation and Shanghai Xiua Industrial Corporation is located
in the Pudong Industrial Zone of Shanghai. This venture produces ball bearings
for sale in the U.S. by the Company.
Ningbo General Bearing Company ("NGBC"), a joint venture between General
Bearing Corporation and China Ningbo Genda Bearing Company, Ltd., was
established in early 1998. Located in Yuyao City, China, this venture shall
manufacture ball and roller bearings and their components. Initially, the
ventures production will be dedicated for sale by the Company to the U.S.
automotive industry.
In addition, World Machinery Company ("World"), which owns 76.9% of the
Company's common stock, has entered into two additional joint ventures with a
Chinese bearing manufacturer. These joint ventures are suppliers to the Company.
Rockland Manufacturing Company, ("Rockland") a joint venture between a
subsidiary of World Machinery Company and Wafangdian USA Ltd., was established
in 1993 and exists at the facilities of the Company. Rockland offers flexibility
to the Company by providing readily accessible inventory which the Company pays
for at the time it needs it.
Wafangdian General Bearing Co., Ltd. ("WGBC"), is a joint venture between
World Machinery Company ("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, it is proposed that
WGBC will produce railroad bearings for sale in the U.S. by the Company.
World has granted the Company options, exercisable prior to December 31,
1999, to purchase from World, its interest in 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
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contributions, advances for administrative expenses and other costs paid by
World with respect to such ventures prior to December 31, 1997; plus any
additional capital contributions made and administrative expenses incurred on
behalf of the joint venture by World after such date.
SALES, MARKETING AND CUSTOMERS
The Company markets its products in the U.S. and abroad through 11
salaried sales employees as well as 27 commissioned independent sales
representative organizations, aggregating 95 sales persons. In addition, the
Company has 7 customer service representatives responsible for handling orders
and providing sales support. Products sold through the OEM Division bear The
General(R) label for ball bearings and the Hyatt(R) brand for all types of
roller bearings.
The Company participates in trade shows sponsored by the Truck Maintenance
Council, American Trucking Association and the Railway Supply Association. The
Company spent $204,000 on advertising for fiscal 1997 and it anticipates that
its advertising budget for fiscal 1998 will be between $150,000 and $200,000.
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
350 customers. The Distribution Division markets the same broad line of bearing
products as the OEM division. The Distribution Division has over 1,050
customers, ranging in size from Motion Industries and Applied Industrial
Technology, each of which has approximately 400 stores in the U.S., to
independent single outlet operations. The OEM Division focuses on the
transportation industry, truck trailer manufacturers, railroad locomotive and
freight car manufacturers and automotive manufacturers. No customer accounted
for more than 10% of the Company's consolidated revenues for fiscal 1997.
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.
EMPLOYEES
As of December 31, 1997, the Company had 142 full-time employees, of whom
77 were engaged in production, shipping and receiving and maintenance, and 21 of
whom were engaged in sales and marketing. 65 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, 2000. The
Company believes that relations
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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, American Koyo Corp., NTN Bearing Corporation of
America, The Torrington Company and FAG Holding Corporation. 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 Hyatt(R) trademark, 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.
The Company's use of the Hyatt(R) trademark is pursuant to a license with
General Motors. Under the Hyatt License, the Company has the right to use the
terms "Hyatt," "Hyatt Railway," "Hyatt Railway Products," "Hyatt Manufacturing,"
"Hyatt General" and various derivatives of "Hyatt" in connection with locomotive
journal boxes, traction motor bearings, component parts thereof, and other
products. The term of the Hyatt License extends until January 1, 2000, and may
be renewed at the option of the Company for an additional ten year term. The
Company paid GM an initial fee of $30,000 upon execution of the Hyatt License
and has paid or will pay an annual licensing fee to GM in an amount increasing
from $20,000 in 1990 to $35,000 in 1999. The fee payable by the Company upon the
exercise of its option to renew the Hyatt License is based upon a benchmark of
$27,500 indexed for inflation as of 1999.
ENVIRONMENTAL COMPLIANCE
The Company's operations and products are subject to extensive federal,
state and local regulatory requirements relating to pollution control and
protection of the environment. Based on information compiled to date, management
believes that the Company's current operations are in material compliance with
applicable environmental laws and regulations. See Legal Proceedings.
Item 2. Properties.
The Company leases a facility located in West Nyack, New York, which has
approximately 190,000 square feet of floor space. Management believes that the
plant is adequate for the Company's present
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needs and anticipated expansion. The West Nyack facility, which is used
principally for administrative, assembly, manufacturing, and distribution
purposes, is owned by Gussack Realty Company ("Realty"). On November 1, 1996,
the Company and Realty entered into a lease for the West Nyack facility
("Lease"), which provides for an initial term expiring on October 31, 2003, and
is renewable at the option of the Company for an additional six year term. The
Company pays rent of $4.81 per square foot (or $912,840) annually, payable in
monthly rent payments of $76,070. The Lease provides for an increase in the rent
every other year, commencing in 1998, to the greater of (i) 106% of the next
preceding year's rent or (ii) the preceding years rent multiplied by a fraction
the numerator of which is the Consumer Price Index for the area including
Rockland County or, if no such index is published, for Northern Jersey ("CPI")
in effect 90 days prior to November 1 of the new rent year and the denominator
of which is the CPI in effect 90 days prior to November 1 of the preceding year.
Simultaneously, the Company entered into a sublease with WMW Machinery Co. and
World for approximately 31,000 and 5,500 square feet of the West Nyack facility,
respectively. See "Item 13 Certain Relationships and Related Transactions." The
lease for the Union, New Jersey facility, which was used principally for
assembly, manufacturing and distribution purposes, was terminated by agreement
effective December 1997. Rent expense for the Union location was approximately
$204,000, $216,000 and $333,000 in 1995, 1996 and 1997, respectively. The
Company anticipates WMW Machinery Co., Inc. vacating the 36,500 square feet by
the end of 1998, as the Company requires the use of the space for its own needs.
Item 3. Legal Proceedings.
Timken vs. United States
On August 25, 1986, Timken, a U.S. producer of tapered roller bearings,
filed a petition on behalf of the U.S. tapered roller bearing industry with both
the International Trade Commission ("ITC") and Department of Commerce
("Commerce") seeking the imposition of antidumping duties on imports of tapered
roller bearings from Japan, Italy, the former Yugoslavia, Romania, Hungary and
the PRC. In May 1987, Commerce found that tapered roller bearings from each of
the aforementioned countries were being sold in the U.S. at less than fair
value, as determined by Commerce based upon an estimate of the foreign market
value of tapered roller bearings (i.e. the price at which the same or similar
merchandise is sold or offered for sale in the principal markets of the home
market country). Commerce subsequently issued an antidumping order imposing
duties on the unfairly traded tapered roller bearings equal to the percentage
difference between the selling prices in the U.S. and the foreign market value
of the imported tapered roller bearings during specified review periods. Among
others, the order named SGBC, the Company's joint venture in the PRC. Importers
subject to the antidumping order are required to post a cash deposit with the
U.S. Customs Service equal to the antidumping margin percentage multiplied by
the export price of any imported product covered by the dumping petition. On
February 3, 1997, Commerce granted the Company's joint venture, SGBC, partial
revocation of the antidumping order affecting tapered roller bearings from the
PRC. As a result of SGBC receiving zero or de minimis antidumping margins for
the 4th, 5th and 6th Reviews, Commerce revoked the antidumping order as to SGBC
in the 7th Review. As a
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result of the revocation, SGBC and the Company will no longer be required to
participate in the annual reviews of the antidumping order conducted by
Commerce.
Timken has filed actions against the United States in the Court of
International Trade challenging Commerce's final antidumping determinations of
the 4th, 5th, 6th, 7th and 8th Reviews, including the revocation as to SGBC. The
Company has filed appearances in those actions and is opposing Timken therein.
Briefs have been filed and oral argument was heard in the actions challenging
the 4th, 5th, and 6th reviews on February 20th, 1998. The parties are now
awaiting a ruling. Briefs have been filed in the action challenging the 7th and
8th Reviews, but oral argument has not yet been scheduled.
WMW et al vs. WEMEX et al
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 Machinery Inc. ("WHW"). 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 sought a
declaratory judgment that any indebtedness it may have owed 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. On March 17th, 1998, the parties reached a tentative
settlement of all claims, including counterclaims and third party claims. Under
the terms of settlement applicable to the Company, the Company would release all
of its claims against the defendants and the defendants would release all claims
against the Company without the Company making or receiving payment of any kind.
Accordingly, the settlement will have no impact on the Company's financial
condition.
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Gussack Realty Company and General Bearing Corporation vs. Xerox
In 1995 Gussack Realty Company ("Realty") and the Company filed an action
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 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. In
July, 1997, Xerox filed a counterclaim against the Company and Realty, seeking
contribution for Xerox's remediation costs based upon Xerox's allegation of a
discharge of contaminants into the subsurface at the Blauvelt facility .
Inasmuch as neither Realty nor the Company have any knowledge of any such
discharge and the New York State Department of Environmental Conservation has no
record of any such discharge, the Company believes the counterclaim to be
without merit and filed an Answer denying the allegations of the Counterclaim.
In September, Realty and the Company filed a motion seeking to dismiss the
counterclaim on the grounds that it is barred by the applicable statute of
limitations. Xerox has responded to the motion and filed its own motion for
summary judgment to which Realty and the Company have responded. The parties are
waiting for the Court to reschedule oral argument which was previously scheduled
for February, 1998, but was adjourned by the Court. In addition, the Company has
filed a motion in the United States Bankruptcy Court for the Southern District
of New York, seeking to hold Xerox in Contempt and for sanctions, on the grounds
that the counterclaim filed by Xerox against the Company was discharged upon
confirmation of the Company's Chapter 11 Reorganization Plan in 1993. Xerox has
responded to the motion, which was filed in October, 1997, and has filed its own
motion with the U.S. District Court seeking to remove consideration of the
bankruptcy motion from the bankruptcy judge and have it decided by the District
Court judge ("motion to withdraw the reference"). The Company has responded to
the motion to withdraw the reference and oral argument is scheduled for April 7,
1998. While the Company believes its legal position in the above action to be
correct, the Company cannot predict the outcome of the litigation but intends to
vigorously defend its position.
Item 4. Submission of Matters to a Vote of Security Holders.
INAPPLICABLE
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been quoted on the NASDAQ Small Cap market
under the symbol "GNRL" since the Company's initial public offering effective
February 7, 1997.
1997
-------------------------------------------------
Stock Prices High Low
-------------------------------------------------
1st Quarter 7 1/4 5 1/2
2nd Quarter 9 3 7/8
3rd Quarter 15 3/8 6 9/16
4th Quarter 25 1/2 12 1/2
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for future growth
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future.
At March 2, 1998, the Company believes it had an excess of 840 holders of
its Common Stock.
10
<PAGE>
Item 6. Selected Financial Data
The selected financial data set forth below is derived from the Company's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual report. See Management Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
General Bearing Corporation
Selected Financial Data
(In Thousands Except for Share and Per Share Data)
Years Ended
- ----------------------------------------------------------------------------------------------------------------
December 25, December 31, December 30, December 28, December 27,
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 27,254 $ 37,032 $ 42,070 $ 38,362 $ 42,153
Operating income (loss) $ (387) $ 874 $ 354 $ 3,201 $ 4,053
Income (loss) before extraordinary
item and income tax (benefit) $ (365) $ 255 $ (2,229) $ 1,998 $ 3,246
Net income (loss) $ 4,019 $ 363 $ (1,729) $ 2,198 $ 5,346
Net income (loss) per basic share
(before extraordinary item) $ (.02) $ .08 $ (.58) $ .73 $ 1.41
Net income (loss) per basic share $ .17 $ .12 $ (.58) $ .73 $ 1.41
Net income (loss) per diluted share $ .17 $ .12 $ (.58) $ .73 $ 1.38
</TABLE>
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------------------------------------------
December 25, December 31, December 30, December 28, December 27,
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $ 17,618 $ 24,143 $ 27,086 $ 24,399 $ 26,802
Long-term debt (excluding current
portion) $ 4,512 $ 5,218 $ 4,817 $ 4,493 $ 910
</TABLE>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Fiscal 1997 compared to Fiscal 1996
Sales. The Company's sales increased 9.9% from approximately $38.4 million
in fiscal 1996 to approximately $42.2 million in fiscal 1997. This was primarily
due to an increase in the number of units sold, and to a lessor degree to price
increases. Sales of the OEM Division and the Distribution Division represented
62% and 38% of total sales in fiscal 1997, respectively, the same as fiscal
1996. The increase in sales between the two periods reflected a significant
recovery in truck trailer production which resulted in an increase of truck
trailer bearing sales of approximately $2.5 million. Other areas of significant
increases in sales included journal box bearings and related parts for the
locomotive industry, $900,000; spherical roller bearings for various heavy
industrial applications, $700,000; and tapered roller bearings for the truck and
trailer aftermarket, $400,000. These increases in sales were partially offset by
a decrease in sales of tapered journal bearings of $2.6 million.
Cost of Sales. The Company's cost of sales as a percentage of sales
decreased from 72.8% in fiscal 1996 to 69.0% in fiscal 1997. The decrease was
partially the result of a program to increase efficiency in plant operations.
This program entailed the consolidation of operations between the Company's
Union, New Jersey and West Nyack, New York facilities, (completed December
1997), which the Company believes will simplify tooling, personnel and quality
control functions while reducing fixed costs. 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. The Company has increased its sourcing from joint venture
partners and believes that improvements in cost of sales and gross margins
reflect, in part, cost savings associated with such sourcing. In 1997, the
Company concluded its withdrawal from two unprofitable product lines. In
conjunction with the sale or disposition of these product lines, inventory
reserves were reduced by $554,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $7.6 million in fiscal 1996 to $8.6
million in fiscal 1997, and as a percentage of sales, such expenses increased
from 19.9% to 20.4%, respectively. Major areas, and their increases were:
salaries and fringes ($533,000), professional fees ($154,000) and advertising
($99,000).
Operating Income. Operating income increased to approximately $4.1 million
in fiscal 1997 from approximately $3.2 million in fiscal 1996. Operating income
for fiscal 1996 reflects a customer damage recovery of approximately $401,000
recorded in that year. For fiscal 1996, the Company had recovery of
approximately $621,000 relating to the recall. For fiscal 1997, the Company
incurred net plant closing costs of $403,000.
12
<PAGE>
Other Income (Expense). Other expenses decreased by 32.9% from
approximately $1.2 million in fiscal 1996 to $807,000 in fiscal 1997 almost
entirely due to a reduction of interest costs as related to reduced borrowing
requirements.
Income Tax (Benefit). For fiscal 1997, the Company recorded an additional
$2.1 million benefit as compared to the benefit recorded in fiscal 1996, of
$200,000, relating to the anticipated use of net operating loss carry-forwards.
Net Income (Loss). As a result of the factors discussed above, net income
increased to $5.3 million in fiscal 1997 from net income of approximately $2.2
million in fiscal 1996.
Earnings Per Share. Earnings per share in 1997 were $1.41 basic and $1.38
diluted as compared to $.73 basic and diluted respectively in 1996.
Fiscal 1996 compared to Fiscal 1995
Sales. The Company's sales decreased 8.8% from approximately 42.0 million
in fiscal 1995 to approximately 38.4 million in fiscal 1996. Sales of the OEM
Division and the Distribution Division represented 62% and 38% of total sales in
fiscal 1996, respectively, as compared to 66% and 34% of total sales in fiscal
1995. The decrease in sales between the two periods reflected a significant
decline in the production of truck trailers, which resulted in a reduction of
truck trailer bearing sales of approximately $4 million, despite an increase in
the Company's market share for such bearings. In addition, a $300,000 reduction
in sales of OEM ball bearings for various commodity applications was
attributable to the Company's strategy to de-emphasize sales of certain low
margin commodity bearings. These decreases in sales were partially offset by an
increase in fiscal 1996 of approximately $1 million in sales of tapered journal
bearings used in railroad freight cars.
Cost of Sales. The Company's cost of sales as a percentage of sales
decreased from 76.2% in fiscal 1995 to 72.8% in fiscal 1996. The decrease was
partially the result of the commencement of a program to increase efficiency in
plant operations. This program entailed the consolidation of operations between
the Company's Union, New Jersey and West Nyack, New York facilities, which
simplified tooling, personnel and quality control functions. The consolidation
of operations began in the first quarter of 1996. To date, the cost of
consolidation has not been material and has been expensed as a 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 deemphasize sales of low margin
commodity bearings. The Company operates on the principle that a flexible method
of combining product and component purchasing with its own manufacturing and
assembly capabilities can provide high-quality products and cost advantages. In
the last several years, the Company has increased its sourcing from joint
venture partners and 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.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $7.5 million in fiscal 1995 to $7.6
million in fiscal 1996, and as a percentage of sales, such expenses increased
from 17.8% to 19.9%, respectively, due to a decrease in sales.
Provision for Customer Damage Claims. In April 1995, three railroads
reported to the AAR problems with eight of the Company's bearings that were
attributed to misplaced seals. The Company agreed to recall approximately 10,000
tapered journal bearings. As a result, the Company recorded a special provision
of approximately $2.2 million during fiscal 1995 representing an estimated
liability for rework costs and customer damage claims. In comparison, during
fiscal 1996, the Company recorded a credit of approximately $401,000,
representing recovery for customer damage claims. Since the recall and the
conditional reapproval in September 1995 of the Company's sale of tapered
journal bearings, the Company's sales of the product have not attained previous
levels. However, the recall is not expected to affect the future operations and
financial position of the Company.
Operating Income. Operating income increased to approximately $3.2 million
in fiscal 1996 from approximately $354,000 in fiscal 1995. Operating income for
fiscal 1995 reflects a customer damage claim of approximately $2.2 million
recorded in that year. For fiscal 1996, the Company had recovery of
approximately $621,000 relating to the recall.
Other Income (Expense). Other expenses decreased by 53.5% from
approximately $2.6 million in fiscal 1995 to $1.2 million in fiscal 1996. Fiscal
1995 included write-offs of the balance of the Company's (i) equity investment
in a subsidiary ($960,000) and (ii) goodwill ($93,333) due to uncertainty
surrounding the future recovery of cash flows against these assets.
Income Tax (Benefit). For fiscal 1996, the Company accrued an additional
$200,000 benefit as compared to the benefit recorded in fiscal 1995, of
$500,000, relating to the anticipated use of net operating loss carry-forwards.
As of December 28, 1996, the Company had a deferred tax asset valuation reserve
of $3.3 million which has been further reduced.
Net Income (Loss). As a result of the factors discussed above, net income
increased to $2.2 million in fiscal 1996 from a net loss of approximately $1.7
million in fiscal 1995.
Liquidity and Capital Resources
During the three years ended December 27, 1997, the Company's primary
sources of capital have been net cash provided by operating activities, bank
borrowings and financing from affiliates and public offering of the common
stock. 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.
On February 7, 1997, the Company successfully sold 900,000 shares of
common stock to the public at $7 per share. The Company recognized net proceeds
of approximately $4.9 million after expenses from the offering. The Company has
used a portion of these proceeds as working capital and to pay down debts.
14
<PAGE>
At December 28, 1996, and December 27, 1997, the Company had working
capital of approximately $3.9 million and $8.9 million respectively. Cash flow
from operations for 1997 was $260,000 as compared to $2.9 million during 1996.
The decrease in the Company's cash flow from operations primarily reflects a
paydown of debt to parent and affiliates and trade accounts payable as well as
an increase in accounts receivable. These cash outlays were partially offset by
a reduction in inventory.
Historically, the Company has used cash provided by operations to fund a
portion of its operating requirements and capital expenditures. The Company also
has relied on borrowings under its $15.0 million Revolving Credit Facility with
Bank of New York Commercial Corporation ("BNYCC") to fund operations. As of
December 27, 1997, $5.8 million was available 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 1999 and will remain available through that date. The Revolving Credit
Facility allows for borrowings, from time to time, not to exceed the lesser of
$15.0 million or an amount equal to the sum of (i) 85% of eligible receivables,
as defined, (ii) 50% of eligible inventory, as defined, consisting of raw
materials, (iii) 50% of eligible inventory, as defined, consisting of finished
goods, and (iv) 50% of eligible inventory, as defined, in transit under letters
of credit less the sum of the (x) the aggregate amount of outstanding letters of
credit and (y) such reserves as the lender may reasonably deem proper and
necessary from time to time. In 1997 the Company requested and obtained more
favorable terms, including interest rate reductions and lower fees, on the
Revolving Credit Facility. 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 December 27, 1997, the Company
was in violation of one of its covenants; however the Bank agreed to waive that
violation as of December 27, 1997.
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 this level. Additionally, the Company has entered
into a joint venture agreement which required a total contribution of $1.0
million. The remaining balance due and to be paid in 1998 is $750,000.
The Company believes that funds generated from continuing operations and
borrowings under the Revolving Credit Facility will be sufficient to finance the
Company's anticipated working capital needs and capital expenditure requirements
for at least the next 24 months.
Year 2000 Compliance
The Company has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the "Year 2000" issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's operating
system and database system are "Year 2000" compliant. The Company presently
believes that with minor modifications to existing software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified. However, no such modifications or conversions
has or will require material expenditures.
15
<PAGE>
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
reporting and disclosure standards. Results of operations and financial position
will be unaffected by implementation of these new standards.
SFAS 130, "Reporting Comprehensive Income", established standards of
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise",
establishes standards of the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards of disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements of
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of SFAS 130 and 131 are not expected
to have any material effect on the Company's financial statement disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which standardizes the
disclosure requirements for pensions and other postretirement benefits. Due to
the recent issuance of this standard, management has been unable to fully
evaluate the extent of future financial statement disclosures that may be
required.
Inflation
The effect of inflation on the Company has not been significant during the
last two fiscal years.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants.............. F-20
Consolidated Balance Sheets, December 28, 1996 and December
27, 1997....................................................... F-21
Consolidated Statements of Operations for the Years Ended
December 30, 1995, December 28, 1996 and December 27, 1997...... F-22
Consolidated Statements of Stockholders' Equity for the
Years Ended December 30, 1995, December 28, 1996 and December
27, 1997........................................................ F-23
Consolidated Statements of Cash Flows for the Years Ended
December 30, 1995, December 28, 1996 and December 27, 1997...... F-24
Notes to Consolidated Financial Statements...................... F-29-41
17
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
THREE YEARS ENDED DECEMBER 27, 1997
F - 18
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
THREE YEARS ENDED DECEMBER 27, 1997
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-20
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-21
Statements of operations F-22
Statements of changes in stockholders' equity F-23
Statements of cash flows F-24
Summary of significant accounting policies F-25 - 28
Notes to consolidated financial statements F-29 - 41
F - 19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
We have audited the accompanying consolidated balance sheets of General Bearing
Corporation and subsidiaries as of December 28, 1996 and December 27, 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
27, 1997. 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 28, 1996 and December 27, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 27, 1997, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
February 28, 1998, except for the third
paragraph of Note 14(d) which is
as of March 17, 1998.
F - 20
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 27,
ASSETS 1996 1997
------------ ------------
<S> <C> <C>
Current:
Cash $ 12,969 $ 117,941
Accounts receivable - trade, less allowance for doubtful
accounts of $235,000 and $235,000 4,575,493 5,473,096
Inventories 13,898,595 11,747,009
Prepaid expenses and other current assets 467,081 878,745
Advances to parent and affiliates 710,397 2,178,261
------------ ------------
Total current assets 19,664,535 20,395,052
------------ ------------
Fixed assets, net 2,604,670 2,387,062
------------ ------------
Investments and advances:
Investments in affiliates 687,454 712,717
Advances to affiliate 255,824 398,037
------------ ------------
943,278 1,110,754
------------ ------------
Deferred tax asset, net 700,000 2,880,000
------------ ------------
Other assets 486,182 28,954
------------ ------------
Total Assets $ 24,398,665 $ 26,801,822
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Note payable - bank $ 9,526,484 $ 5,439,707
Accounts payable:
Trade 1,998,361 1,313,851
Affiliates 1,774,013 263,160
Parent -- 251,750
Accrued expenses and other current liabilities 2,245,386 1,938,654
Current maturities of long-term debt 222,840 2,253,042
------------ ------------
Total current liabilities 15,767,084 11,460,164
------------ ------------
Long-term debt, less current maturities:
Bank 1,002,900 --
Parent 2,750,142 --
Affiliate 739,588 909,973
------------ ------------
Total long-term liabilities 4,492,630 909,973
------------ ------------
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 and
3,900,000 shares 30,000 39,000
Additional paid-in capital 23,654,524 28,592,387
Deficit (19,545,573) (14,199,702)
------------ ------------
Total stockholders' equity 4,138,951 14,431,685
------------ ------------
Total liabilities and stockholders' equity $ 24,398,665 $ 26,801,822
============ ============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F - 21
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 42,070,000 $ 38,362,128 $ 42,152,766
Cost of sales 32,068,789 27,926,232 29,089,516
------------ ------------ ------------
Gross profit 10,001,211 10,435,896 13,063,250
Selling, general and administrative expenses 7,495,208 7,635,824 8,607,027
Provision (recovery) - customer damage claims 2,152,000 (400,959) --
Plant closing costs, net -- -- 402,856
------------ ------------ ------------
Operating income 354,003 3,201,031 4,053,367
------------ ------------ ------------
Other (income) expense:
Interest, net, including $180,000, $54,261,
$21,052 to parent 1,428,451 1,223,143 851,878
Equity in income of affiliate (78,587) -- (25,261)
Other 1,233,039 (20,200) (19,121)
------------ ------------ ------------
2,582,903 1,202,943 807,496
------------ ------------ ------------
Income (loss) before income tax benefit (2,228,900) 1,998,088 3,245,871
Income tax (benefit) (500,000) (200,000) (2,100,000)
------------ ------------ ------------
Net Income (loss) $ (1,728,900) $ 2,198,088 $ 5,345,871
============ ============ ============
Income (loss) per common share:
Basic $ (.58) $ .73 $ 1.41
------------ ------------ ------------
Diluted $ (.58) $ .73 $ 1.38
------------ ------------ ------------
Weighted average number of common shares
Basic 3,000,000 3,000,000 3,798,904
------------ ------------ ------------
Diluted 3,000,000 3,000,000 3,868,610
------------ ------------ ------------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F - 22
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- -------------------------- paid-in
Shares Amount Shares Amount capital Deficit
--------- ------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 3,000,000 $30,000 $23,654,524 $(20,014,761)
Net loss -- -- -- -- -- (1,728,900)
--------- ------- ----------- ------------ ----------- ------------
Balance, December 30, 1995 3,000,000 30,000 23,654,524 (21,743,661)
Net income -- -- -- -- -- 2,198,088
--------- ------- ----------- ------------ ----------- ------------
Balance, December 28, 1996 -- -- 3,000,000 30,000 23,654,524 $(19,545,573)
Sale of 900,000 Common Shares -- -- 900,000 9,000 4,937,863 --
Net income -- -- -- -- -- 5,345,871
--------- ------- ----------- ------------ ----------- ------------
Balance, December 27, 1997 -- -- 3,900,000 $ 39,000 $28,592,387 $(14,199,702)
========= ======= =========== ============ =========== ============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F - 23
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,728,900) $ 2,198,088 $ 5,345,871
Add (deduct) noncash items charged(credited) to income:
Deferred income taxes (500,000) (200,000) (2,180,000)
Depreciation and amortization 520,082 557,208 511,487
Equity in income of affiliate (78,587) -- (25,261)
Revaluation of equity investment 960,000 -- --
Revaluation of goodwill 93,333 -- --
(Gain) loss on disposal of fixed assets 144,967 (17,838) (36,402)
Other 64,928 -- --
Add (deduct) changes in operating assets and liabilities:
Accounts receivable (457,381) 1,468,549 (897,603)
Inventories (2,963,603) 2,727,639 2,151,586
Prepaid expenses and other assets 169,234 (730,093) 42,135
Due to (from) affiliates 617,296 497,782 (3,660,942)
Accounts payable and accrued expenses 1,788,263 (2,035,493) (991,245)
Accrued customer damage claims 1,564,742 (1,564,742) --
----------- ----------- -----------
Net cash provided by operating activities 194,374 2,901,100 259,626
----------- ----------- -----------
Cash flows from investing activities:
Fixed asset purchases (1,111,653) (681,641) (604,832)
Sale of fixed assets -- 21,200 350,785
----------- ----------- -----------
Net cash used in investing activities (1,111,653) (660,441) (254,047)
----------- ----------- -----------
Cash flows from financing activities:
Sale of common shares, net -- -- 4,946,863
Proceeds from long-term debt - bank 1,560,000 -- --
Repayment of long-term debt - bank (111,420) (222,840) (222,840)
Increase (decrease) in note payable - bank 892,785 (1,336,410) (4,086,777)
Repayment of long-term debt and other balances - parent (1,440,304) (719,175) (537,853)
----------- ----------- -----------
Net cash provided by (used in) financing activities 901,061 (2,278,425) (99,393)
----------- ----------- -----------
Net (decrease) increase in cash (16,218) (37,766) 104,972
Cash, beginning of year 66,953 50,735 12,969
----------- ----------- -----------
Cash, end of year $ 50,735 $ 12,969 $ 117,941
=========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F - 24
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company General Bearing Corporation ("General") and subsidiaries
(collectively, the "Company") manufactures, sources, assembles
and distributes ball bearings, including standard radial,
electric motor quality, tapered roller and traction motor ball
bearings, used in a broad range of industrial applications.
The Company supplies bearings to original equipment
manufacturers and to manufacturing industries, railroad
companies and the industrial aftermarket primarily in the
United States and Canada. The Company also markets bearings
for freight cars and locomotives worldwide. At December 27,
1997, the Company is a 76.9% owned subsidiary of World
Machinery Company ("World" or "Parent").
Principles of The accompanying consolidated financial statements include the
Consolidation accounts of General and two majority-owned subsidiaries which
are inactive at the end of 1997. 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.
Evaluating The Company reviews the carrying values of its long-lived and
Recoverability identifiable intangible assets for possible impairment
of Long Lived whenever events or changes in circumstances indicate that the
Assets carrying amount of the assets may not be recoverable. The
Company assesses recoverability of these assets by estimating
future nondiscounted cash flows. Any long-lived assets held
for disposal are reported at the lower of their carrying
amounts or fair value less cost to sell.
F - 25
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue The Company recognizes revenue when products are shipped.
Recognition
Reporting The reporting period for the Company is a 52-53 week period
Period ending on the last Saturday in December. There were 52 weeks
in each of the periods ended December 30, 1995 and December
28, 1996 and December 27, 1997.
Income Taxes The Company filed a consolidated Federal income tax return
with its Parent through the date of its initial public
offering; thereafter, it will file its own federal return.
State and local tax returns are filed separately for the
entire year. Federal income taxes are calculated as if the
Company filed its tax return on a separate return basis for
all periods presented. Deferred income taxes reflect the net
tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Estimated Fair Statement of Financial Accounting Standards ("SFAS") No. 107,
Value of "Disclosure About Fair Value of Financial Instruments",
Financial requires disclosures of fair value information about financial
Instruments instruments, for which it is practicable to estimate the
value, whether or not recognized on the balance sheet.
The fair value of financial instruments, including cash,
accounts receivable and accounts payable, approximate their
carrying value because of the current nature of these
instruments. The carrying amounts of the Company's note
payable - bank and long-term debt - bank approximate fair
value because the interest rates on these instruments are
subject to changes with market interest rates. It is not
practical to determine the fair value of receivables from,
payables to and long-term debt payable to the parent and
affiliates because of the nature of their terms. The repayment
terms are subject to managements' discretion.
Concentrations The Company extends credit based on an evaluation of the
of Credit Risk 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.
F - 26
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-Based In October 1995, the Financial Accounting Standards Board
Compensation issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 123 requires entities which have arrangements under
which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of its stock to
either record the fair value of the arrangements or disclose
the proforma effects of the fair value of the arrangements.
The Company has adopted the disclosure method of SFAS No. 123.
Earnings Per Earnings per common share are computed on the basis of the
Common Share weighted average number of common shares outstanding during
the year. In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings per Share. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per
share amounts for all periods have been restated, and where
necessary, restated to conform to the Statement 128
requirements.
Effect of In June 1997, the Financial Accounting Standards Board issued
Recently Issued two new disclosure standards.
Accounting
Standards
Statement of Financial Accounting Standards No. 130 ("SFAS No.
130"), Reporting Comprehensive Income, establishes standards
for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those
resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS No.
131"), Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, establishes standards
for the way that public enterprises report information about
operating segments in annual financial statements and requires
reporting of selected information about operating segments in
interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise
about which separate financial information is available that
is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial
statements for periods beginning after December 15, 1997 and
require comparative information for earlier years to be
restated. The adoption of these standards is not expected to
impact the Company's financial statements or disclosures.
F - 27
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits",
which standardizes the disclosure requirements for pensions
and other postretirement benefits. Due to the recent issuance
of this standard, management has been unable to fully evaluate
the extent of future financial statement disclosures that may
be required.
F - 28
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Initial In February, 1997, the Company completed an initial public
Public offering ("IPO") in which 900,000 shares of common stock were
Offering sold for $ 7 per share for a total consideration of $ 6.3
million. Net proceeds received by the Company amounted to
approximately $ 4.9 million. The Company has used a portion of
these proceeds as working capital and to pay down debt.
2. Inventories Inventories consist of the following:
December 28, December 27,
1996 1997
- --------------------------------------------------------------
Finished goods $ 6,958,972 $ 7,528,784
Raw materials, purchased parts and
work-in-process 6,939,623 4,218,225
- --------------------------------------------------------------
$13,898,595 $11,747,009
==============================================================
3.Fixed Assets Fixed assets consist of the following:
December 28, December 27,
1996 1997
- --------------------------------------------------------------
Machinery and equipment $ 4,802,427 $ 3,888,097
Furniture and fixtures 393,298 370,065
Leasehold improvements 469,587 588,971
Transportation equipment 36,136 39,786
- --------------------------------------------------------------
5,701,448 4,886,919
Less: Accumulated depreciation
and amortization 3,096,778 2,499,857
- --------------------------------------------------------------
$ 2,604,670 $ 2,387,062
==============================================================
Depreciation and amortization expense was $518,368, $553,779 and $508,058 for
the years 1995, 1996 and 1997, respectively.
The Company purchased, through affiliates, $750,000 and $145,000 of machinery
and equipment in 1995 and 1997, respectively.
F - 29
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Other Assets Other assets consist of the following:
December 28, December 27,
1996 1997
- ------------------------------------------------------------------------------
Security deposits and other $ 17,325 $ 13,525
Deferred loan costs 18,857 15,429
Deferred registration costs 450,000 --
- ------------------------------------------------------------------------------
$ 486,182 $ 28,954
==============================================================================
5. Investments
and Advances
December 28, December 27,
1996 1997
- ------------------------------------------------------------------------------
Investments in affiliates:
Less than 50%-owned - at equity:
Shanghai General Bearing Co., Ltd.
(25%-owned) (a) $ 687,454 $ 712,717
- ------------------------------------------------------------------------------
Advances to Parent and affiliates:
Current:
Parent (b) $ 710,397 --
Rockland Manufacturing Company (c) -- 916,712
Shanghai General Bearing Co., Ltd. (a) -- 390,889
Wafangdian General Bearing Co., Ltd. (c) -- 870,660
- ------------------------------------------------------------------------------
$ 710,397 $2,178,261
==============================================================================
- ------------------------------------------------------------------------------
Long-term:
General IKL Corp. (see Note 12(e)) $ 255,824 $ 398,037
==============================================================================
F - 30
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) At December 27, 1997, the Company's investment in Shanghai
General Bearing Company Ltd., ("SGBC") was $712,717. 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. The advances primarily relate to inventory
purchases.
(b) Includes accrued interest payable to the Parent of $450,000 as
of December 1996 relating to the subordinated note (Note 8).
This receivable was offset against the subordinated note in
1997.
c) The companies are joint ventures of the Parent and the
advances relate primarily to inventory purchases and
administrative expenses. World has granted to the Company two
options, exercisable prior to December 31, 1999, to purchase
from World its interest in their two joint ventures, Rockland
Manufacturing Company and Wafangdian General Bearing Co., 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 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.
6. Note Payable- The Company is obligated to a bank under a revolving line of
Bank credit which expires on June 20, 1999 and a term loan (see
Note 8). The loan and security agreement provides the Company
with a secured line of credit of up to $15 million for working
capital, acceptances and letters of credit.
F - 31
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 either the bank's prime rate plus a percentage, ranging
from .25% to 1.75%, or LIBOR plus a percentage ranging from
1.75% to 2.75%. These percentages are determined annually
based upon the financial performance of the Company. The
average monthly rate in effect at December 27, 1997 was LIBOR
plus 3.0%, or 8.70%. 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. In 1997, the Bank waived the
restrictions relating to $1,500,000 of loan repayments to
World Machinery (Note 8). At December 27, 1997, the Company
was in violation of one of its covenants; however, the Bank
agreed to waive that violation as of December 27, 1997.
As of December 27, 1997, borrowing under the credit line
amounted to $5,439,707.
Commitments under letters of credit amounted to $657,618 at
December 27, 1997. C
7. Taxes on The benefits for Federal, state and local income taxes consist
Income of the following:
Years Ended
---------------------------------------
December 30, December 28, December 27,
1995 1996 1997
- -----------------------------------------------------------------
Deferred:
Federal $ (473,000) $ (189,200) $(2,091,600)
State and local (27,000) (10,800) (88,400)
- -----------------------------------------------------------------
$ (500,000) $ (200,000) $(2,180,000)
Current:
Federal - - 80,000
State and local - - -
- -----------------------------------------------------------------
$ (500,000) $ (200,000) $(2,100,000)
=================================================================
F - 32
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The major elements contributing to the difference between Federal statutory rate
and the Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
Year ended
---------------------------------------
December 30, December 28, December 27,
1995 1996 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34.0%) 34.0% 34.0%
Increase (decrease) in valuation allowance
(due primarily to non-utilization of net
operating loss) 12.5 (42.1) (90.6)
Permanent and other differences .9 8.1 (1.4)
- -----------------------------------------------------------------------------------------
(22.4%) (10.0%) (58.0%)
=========================================================================================
</TABLE>
Temporary differences which give rise to a significant portion of deferred tax
assets and liabilities are as follows:
December 28, December 27,
1996 1997
- -----------------------------------------------------------------------------
Gross deferred tax assets:
Accounts receivable allowances $ 88,000 $ 88,000
Net operating loss carry forwards 4,030,000 2,954,000
Other 100,000 53,000
- -----------------------------------------------------------------------------
4,218,000 3,095,000
Gross deferred tax liabilities:
- -----------------------------------------------------------------------------
Plant and equipment depreciation differences 265,000 215,000
3,953,000 2,880,000
Valuation allowance 3,253,000 --
- -----------------------------------------------------------------------------
$ 700,000 $2,880,000
=============================================================================
Management believes the deferred tax asset will more likely than not be fully
realized based on the Company's historical earnings and future expectations of
adjusted taxable income.
As of December 27, 1997, the Company has Federal tax loss carryovers of
approximately $8.4 million expiring at various dates through the year 2010.
F - 33
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term
Debt
December 28, December 27,
1996 1997
- --------------------------------------------------------------------------------
Bank:
$1,560,000 three year loan from the
same bank referred to in Note 6.
Interest is calculated at the bank's
prime rate plus 2%; 10.5% at December
27, 1997; principal of $18,570 plus
interest is payable monthly, through
June 1, 1998 with final payment of
$910,050 due July 1, 1998. $1,225,740 $1,002,900
Less: Current maturities 222,840 1,002,900
- --------------------------------------------------------------------------------
1,002,900 --
- --------------------------------------------------------------------------------
Parent:
6% subordinated promissory notes due
December 1998. Interest is accruable
but is to be paid annually only out of
net income in excess of $400,000. The
notes are subordinated to the bank
referred to in Note 6. In 1997,
General agreed to offset $1,500,000 of
accounts receivable from World against
this loan. 2,500,000 1,000,000
Noninterest-bearing promissory note,
payable in annual installments of
$125,000 commencing December 1993. The
1993 and 1994 installments were
deferred until, and paid in, 1995.
Repayment is subject to management
discretion and was waived for 1997. 250,142 250,142
- --------------------------------------------------------------------------------
2,750,142 1,250,142
Less: Current Maturities -- 1,250,142
- --------------------------------------------------------------------------------
2,750,142 --
Affiliates:
General-IKL Corp.(see Note 13(e)) 739,588 909,973
- --------------------------------------------------------------------------------
$4,492,630 $ 909,973
================================================================================
The repayment terms of the long-term debt - parent and affiliates are stated
above or are at the discretion of management.
F - 34
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Discretionary The Company and certain of its affiliates maintain profit
Profit sharing plans covering eligible salaried and nonunion
Sharing Plan employees. Contributions are made to the plans at the
discretion of the management of the Company. The Company
recorded contributions of $180,000 in 1997 and $120,000 in
1996. There were no contributions recorded in 1995.
10.Provision In 1995, the Company was notified that certain wheel bearings
for Customer supplied to the railroad industry did not meet specifications.
Damage Claims 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. During the later part of 1996, the Company received
notice from various vendors that it will be reimbursed for
approximately $921,000 of costs relating to the recall. The
Company has included $220,000 in cost of sales, $401,000 in
operating income and reduced interest expense by $81,000.
11.PlantClosing In connection with the closing of its New Jersey facility in
Costs, net October 1997, the Company recorded scrap sales of $150,000, a
gain on sale of equipment of $50,000, and plant closing costs
of $602,856.
12.Operating Other (income) expense consists of:
Items
- --------------------------------------------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
Revaluation of equity investment (a) $ 960,000 $ -- $ --
Revaluation of goodwill (b) 93,333 -- --
Other 179,706 (20,200) (19,121)
- --------------------------------------------------------------------------------
$ 1,233,039 $(20,200) $ (19,121)
===============================================================================
The Company incurred interest expense of $1,428,451, $1,399,402 and $1,002,258
in 1995, 1996 and 1997 respectively.
F - 35
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) During 1995 the Company revalued its equity
investment in Alurop Trading Corp., a holding
company whose principal asset is WMW Machinery of
New Jersey, Inc. ("WMW"), to properly reflect
share of equity to be realized from the
investment. In February 1995, the Company brought
an action against the other 50% shareholder in
Alurop, since it was unable to amicably resolve
its dispute with this party, who also had been a
principal supplier to WMW. Accordingly, the
Company has written off its investment in Alurop
due to the uncertainties relating to this
litigation (Note 14d)).
(b) The Company elected early adoption of 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 requires that assets such as goodwill
be written down to fair value when events and
circumstances indicate impairment.
(c) In 1997 the Company liquidated two product lines
which in the prior year were partially reserved.
Related to these product lines, inventory reserves
were reduced by $554,000.
13. Transactions (a) The Company made purchases of approximately $9.1
with million, $6.6 million and $10.0 million from
Affiliates affiliates in 1995, 1996 and 1997, respectively.
Accounts payable - affiliates relate primarily to
these purchases.
(b) General shares office facilities and provides
services for an affiliate. General charged this
affiliate $120,000 per year in each of the 3 years
ended December 27, 1997.
(c) General leases its corporate headquarters from
Gussack Realty Company ("Realty"), which is owned
by shareholders of World. Rent and real estate
taxes paid to the affiliate were approximately
$861,000, $ 939,000 and $1,144,004 in 1995, 1996
and 1997, respectively (see Note 14).
(d) The Company made payments for and advances to
certain affiliates for payroll, benefits, and
other expenses. Such payments aggregated
$1,742,000, $1,691,000 and $1,102,000 for the
fiscal years ended 1995, 1996 and 1997,
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 accrues interest on the balances due to
and from this affiliate.
14. Commitments (a) Effective January 1996, the Company completed a
and move to new facilities owned by Realty. Existing
Contingencies obligations under a long-term lease for the
previous facilities, also owned by Realty, were
waived. Prior to November 1, 1996, the facilities
were leased on a month-to-month basis.
F - 36
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into a lease agreement with
Realty for its new premises effective November 1,
1996 for an initial term of seven years.
Concurrently, the Company entered into sublease
agreements with World and WMW Machinery Co., Inc.,
an affiliate. Rent expense consists of the
following:
Year ended
----------------------------------------
December 30, December 28, December 27,
1995 1996 1997
- --------------------------------------------------------------------------------
Gross rent paid (excluding taxes) $748,320 $770,990 $912,840
Less: Reimbursed from related companies 224,820 54,792 184,890
- --------------------------------------------------------------------------------
$523,500 $716,198 $727,950
================================================================================
Minimum annual rentals and rental income under these agreements are as follows:
Minimum
Annual Rental
Year Rentals Income Net
--------------------------------------------------------------
1998 $921,968 ($205,232) $716,736
1999 967,608 (215,392) 752,216
2000 977,284 (217,545) 759,739
2001 1,025,664 (228,315) 797,349
2002 1,035,920 (230,599) 805,321
Thereafter 906,000 (201,678) 704,322
--------------------------------------------------------------
$5,834,444 ($1,298,761) $4,535,683
==============================================================
(b) The Company was obligated under an operating lease
for manufacturing facilities located in New Jersey
through May 1999. The Company ceased operations at
this facility in November 1997 and has accrued a
final payment pursuant to a termination agreement
with the Landlord. (See Note 11).
(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 27, 1997, future payments required
under the agreement total $96,250.
F - 37
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) In 1995, General and WMW Machinery of New Jersey,
Inc. (formerly WMW Machinery, Inc.) commenced an
action for damages in the United States District
Court for the Southern District of New York
against the successor to a former East German
Foreign Trade Organization and certain other
German parties.
The defendants filed an answer and counterclaim
which included a claim against General and certain
affiliates in the amount of $9,507,337 for
allegedly failing to provide the working capital
requirements of WMW Machinery of New Jersey, Inc.
On March 17th, 1998, the parties reached a
tentative settlement of all claims. The settlement
will have no financial impact on the Company.
Additionally, US Customs has a claim against the
Company, which the Company believes to be without
merit. The Company intends to vigorously defend
this claim and believes that the claim will not
have a material impact on the Company.
(e) General is party to a trademark license agreement
which provides for increasing annual fees of
between $25,000 and $35,000 through 1999, and
$35,000 per year plus an inflation factor
thereafter until 2009. The agreement contains an
acceleration clause which provides for immediate
payment of all remaining fees in the event of
breach of contract.
(f) The Company has guaranteed certain of Realty's
outstanding obligations of approximately $1.0
million to a bank and other parties.
(g) In 1995 Realty and the Company filed an action
against Xerox Corporation, for contamination
caused by Xerox of property formerly leased by the
Company and owned by Realty in Blauvelt, New York.
Xerox has counterclaimed alleging that the Company
contaminated the property and increased remedial
costs to Xerox. Management believes the
counterclaim against the Company to be entirely
without merit and anticipates that the claim will
have no material impact on the Company.
F - 38
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.Stockholders' In connection with the IPO (Note 1) of its common stock, the
Equity Company, on October 10, 1996, filed an amendment to its
Certificate of Incorporation, increasing the authorized common
shares from 10,600 to 19,000,000 and changing its $.10 par
value per common share to $.01 par value, and effecting a
3,000-for-one stock split. All share and per share data in the
consolidated financial statements have been adjusted to give
retroactive effect to the stock split.
16.Stock Options In September 1996, the Company adopted the 1996 Stock Option
and Performance Award Plan ("1996 Plan"), which authorizes the
granting to directors, officers and key employees of the
Company of incentive or nonqualified stock options,
performance shares, restricted shares and performance units.
The 1996 Plan covers up to 500,000 shares of common stock.
The exercise price of any incentive stock option granted to an
eligible employee may not be less than 100% of the fair market
value of the shares underlying such option on the date of
grant, unless such employee owns more than 10% of the
outstanding common stock or stock of any subsidiary or parent
of the Company, in which case the exercise price of any
incentive stock option may not be less than 110% of such fair
market value. No option may be exercisable more than ten years
after the date of grant and, in the case of an incentive stock
option granted to an eligible employee owning more than 10% of
the common stock or stock of any subsidiary or parent of the
Company, no more than five years from its date of grant.
Options are not transferable, except upon the death of the
optionee. In general, upon termination of employment of an
optionee, all options granted to such person which are not
exercisable on the date of such termination immediately
expire, and any options that are exercisable expire three
months following termination of employment, if such
termination is not the result of death or retirement, two
years following such termination if such termination was
because of death and one year following such termination if
such termination was because of disability or retirement under
the provisions of any retirement plan that may be established
by the Company, or with the consent of the Company.
The Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing model
with the following weighted average assumptions used for
grants in 1997: no dividend yield, expected volatility of 35%,
risk free interest rates of 6.0% to 6.5% and expected lives of
10 years. If compensation cost for the Company's stock option
plan had been determined in accordance with SFAS No. 123, net
income would have been reduced in 1997 by approximately
$157,000 or $.04 per diluted share.
F - 39
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 27, 1997.
Options Outstanding
------------------------------------------------------
Weighted
average
remaining Weighted
Number contractual life average
Outstanding (years) exercise price
------------------------------------------------------
Exercise Prices
$7.00 187,500 9.1 $ 7.00
$7.70 70,000 9.1 $ 7.70
Transactions under the stock option plan are summarized as follows:
Weighted
Average
Shares Exercise Price
------------------------
Shares under option at December 28, 1996 - -
Granted (at $ 7.00 to $7.70 per share) 257,500 $ 7.19
Exercised - -
Canceled - -
------------------------
Shares under option at December 27, 1997
at $7.00 to $7.70 per share) 257,500 $ 7.19
========================
The weighted average fair value of options granted during 1997 was $3.31.
At December 27, 1997, there were no options that were exercisable.
In connection with the Company's IPO, the Company issued 90,000 warrants
with an exercise price of $9.80. These warrants expire in February 2002.
F - 40
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17.Earnings Per Earnings per share was computed as follows:
Share
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C>
Net income (loss) available to common
stockholders $ (1,728,900) $ 2,198,088 $ 5,345,871
-----------------------------------------------
Basic earnings per share computation:
Weighted Average Common shares outstanding 3,000,000 3,000,000 3,798,904
Basic earnings per share $ (.58) $ .73 $ 1.41
-----------------------------------------------
Diluted earnings per share computation
Weighted Average Common shares outstanding 3,000,000 3,000,000 3,798,904
Incremental shares from assumed conversions
of dilutive options - - 69,706
-----------------------------------------------
3,000,000 3,000,000 3,868,610
-----------------------------------------------
Diluted earnings per share $ (.58) $ .73 $ 1.38
-----------------------------------------------
</TABLE>
18.Supplemental For the periods ended December 30, 1995, December 28, 1996 and
Cash Flow December 27, 1997, the Company paid interest of approximately
Information $1,257,000, $1,316,000, and $940,000 respectively.
The Company paid income taxes of $80,000 in 1997 and $ -0- in
1996 and 1995, respectively.
F - 41
<PAGE>
Supplementary Financial Data
Furnished Pursuant to the
Requirements of Form 10-K
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
The audits referred to in our report dated February 28, 1998 relating to
the consolidated financial statements of General Bearing Corporation and
subsidiaries, which is referred to in Item 8 of this Form 10- K, includes the
audits of the accompanying financial statement schedule for each of the three
years in the period ended December 27, 1997. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein for each of the three years
in the period ended December 27, 1997.
BDO Seidman, LLP
New York, New York
February 28, 1998
42
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
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 30, 1995
Allowance for Doubtful Accounts... $255,000 $17,050 $17,050 $255,000
-------- ---------- -------------- --------
$255,000 $17,050 $17,050 $255,000
======== ========== ============== ========
Year Ended December 28, 1996
Allowance for Doubtful Accounts... $255,000 $55,762 $75,762 $235,000
-------- ---------- -------------- --------
$255,000 $55,762 $75,762 $235,000
======== ========== ============== ========
Year Ended December 27, 1997
Allowance for Doubtful Accounts... $235,000 -- -- $235,000
-------- ---------- -------------- --------
$235,000 -- -- $235,000
======== ========== ============== ========
</TABLE>
- ----------
(1) Uncollectible accounts written off net of recoveries.
43
<PAGE>
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosures
Since the Company's inception, there has not been any Form 8-K filed
under the Securities and Exchange Act of 1934 reporting a change in accountants
in which there was a reported disagreement on any matter of accounting
principles or practices or financial statement disclosure.
44
<PAGE>
PART III
Item 10. Directors and Executive Officers
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Seymour I. Gussack. 74 Chairman of the Board of Directors
David L. Gussack... 40 President and Director
Jerome Johnson..... 86 Director
Robert E. Baruc.... 46 Director
Peter Barotz....... 70 Director
Nina M. Gussack.... 42 Director
William F. Kurtz... 39 Vice President -- Director of Operations
Lester M. White ... 38 Vice President -- Administration/MIS
Christopher Moore.. 41 Vice President -- Finance, Secretary and Treasurer
Joseph J. Hoo...... 63 Vice President -- Advanced Technology and China Affairs
Set forth below is certain additional information with respect to the
Directors, and executive officers.
SEYMOUR I. GUSSACK founded the Company in 1958 and has served as Chairman
of the Board of Directors and a Director of the Company since its formation.
Seymour I. Gussack is also the Chairman of the Board of Directors and a Director
of World and a partner of Realty. See "Certain Relationships and Related
Transactions" and "Principal Stockholder." Seymour I. Gussack's son is David L.
Gussack, President of the Company and a Director.
DAVID L. GUSSACK became President of the Company in 1993 and has been a
Director of the Company since 1987. David L. Gussack has held various positions
with the Company since 1983, including Executive Vice President from 1991 to
1992, General Manager of the OEM Division from 1988 to 1990, Supervisor and
Coordinator, Hyatt Absorption Project from 1987 to 1988, Plant Manager from 1986
to 1987, Office Facilities Manager from 1985 to 1986, and Manager of Special
Projects from 1983 to 1985. David L. Gussack is a Secretary and a Director of
SGBC and Hyatt-ZWZ, respectively. He also is a partner of Realty. See "Certain
Relationships and Related Transactions." David L. Gussack is a graduate of the
University of Pennsylvania. David L. Gussack's father is Seymour I. Gussack,
Chairman of the Board of Directors of the Company.
LESTER M. WHITE has served as Vice President -- Administration/Management
Information Systems of the Company since 1989. Mr. White is a graduate of
University of Massachusetts, Boston (B.S. in Management and Economics).
45
<PAGE>
WILLIAM F. KURTZ has served as Vice President -- Director of Operations.
He served as Vice President -- Technical Services of the Company from 1993-1997.
Mr. Kurtz was also a Chief Engineer of the Company from 1989 to 1993 and Senior
Project Engineer of the Company from 1988-89. He is a graduate of Manhattan
College (B.E. and M.E. in Mechanical Engineering) and a licensed professional
engineer.
CHRISTOPHER MOORE has served as Vice President -- Finance of the Company
since 1995 and as Secretary and Treasurer since 1993. Prior to that time, Mr.
Moore held various positions in the Company, including Controller from 1986 to
1995 and Assistant Controller from 1984 to 1986. Mr. Moore is a graduate of
Seton Hall University (B.S. in Accounting) and has been a certified public
accountant since 1982.
JOSEPH I. HOO has served as Vice President -- Advanced Technology and
China Affairs of the Company since August 1995. Mr. Hoo served as General
Manager, Industrial Products Division, from 1991 to 1995 and as Chief
Metallurgist from 1987 to 1991. Mr. Hoo is a graduate of the National University
of Japan (B.S. in Engineering) and University of Michigan (M.S.E. in Metallurgy
and Engineering).
JEROME JOHNSON has been a director of the Company since September 1987.
Mr. Johnson has been an attorney in private practice for more than 50 years. He
also serves on the Board of Directors of Presidential Life Insurance Company.
Mr. Johnson is a graduate of DePaul University (J.D. and L.L.B) and is a member
of the Illinois and New York bars.
ROBERT E. BARUC has been a Director of the Company since February 1997.
Since April 1994, Mr. Baruc has been an Executive Vice President of Unapix
Entertainment, Inc., an independent distributor of film and television
programming. Since August 1993, he has been the President and Chief Executive
Officer of A Pix Entertainment, Inc. From December 1992 to August 1993, Mr.
Baruc was President of Triboro Entertainment Group, a company engaged
principally in home video distribution. From January 1991 to December 1992, Mr.
Baruc primarily acted as an independent consultant to the entertainment
industry. He is the son-in-law of Seymour I. Gussack and the brother-in-law of
David L. Gussack and Nina M. Gussack.
PETER BAROTZ has been a director of the Company since December 30, 1997,
when he was elected by the Board of Directors to fill the vacancy resulting from
the death of Harold Geneen. For the past 25 years, Mr. Barotz has been the
President of Panda Capital Corporation.
NINA M. GUSSACK has been a Director of the Company since February 1997.
Ms. Gussack has been litigation partner at the law firm of Pepper, Hamilton, &
Scheetz in Philadelphia, Pennsylvania since 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.
46
<PAGE>
Seymour I. Gussack and David L. Gussack were each officers of the Company
at the time the Company filed for protection from creditors under Chapter 11 of
the U.S. Bankruptcy Code in 1991.
Directors hold office until the next annual meeting of stockholders
following their election, or until their successors are elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
The standing committees of the Board of Directors are the Audit Committee
and the Compensation/ Stock Option Committee.
The Audit Committee of the Board of Directors consists of three directors,
David L. Gussack, Robert E. Baruc and Jerome Johnson. The Audit Committee's
function is to review and report to the Board of Directors with respect to the
selection and the terms of engagement of the Company's independent public
accountants, and to maintain communications among the Board of Directors, such
independent public accountants, and the Company's internal accounting staff with
respect to accounting and audit procedures, the implementation of
recommendations by such independent public accountants, the adequacy of the
Company's internal controls and related matters. The Audit Committee also
reviews certain related party transactions and any potential conflict of
interest situations involving officers, directors or stockholders beneficially
owning more than 10% of an equity security of the Company.
The Compensation/Stock Option Committee consists of Messrs. Peter Barotz
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Fiscal Year 1997
David Gussack inadvertently filed one late Report on Form 4 relating to a
single purchase transaction.
Nina Gussack inadvertently filed one late Report on Form 4 relating to a
single purchase transaction.
47
<PAGE>
Item 11. Executive Compensation
The following table sets forth the aggregate compensation paid for
services rendered in all capacities to the Company's executive officer who
received compensation of $100,000 or more during the fiscal year ended December
27, 1997:
<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 1997 177,151 14,955 45,000 207,589 (2)
David L. Gussack, President 1996 165,675 1,624 10,147 (2)
</TABLE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
- --------------------------------------------------------------------------------------------
Potential Realized
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
- --------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal or Base Expiration
Name Granted Year Price Date 5% 10%
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Gussack 45,000 17.5 7.70 2/7/2002 $55,529 $160,811
</TABLE>
48
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Options at
December 27, December 27,
1997 1997
----------------------------------
Shares Acquired
on Exercise Value Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Gussack 0 0 0/45,000 0/$345,375
</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.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of the date of this Report certain
information concerning the beneficial ownership of Common Stock as to each
director and current executive officer of the Company, and each person who, to
the Company's knowledge, beneficially owns more than 5% of the outstanding
Common Stock.
NUMBER OF
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF SHARES
BENEFICIAL OWNER OWNED (1) BENEFICIALLY OWNED(1)
- ---------------- --------- ---------------------
World Machinery Company ...... 3,000,000(2) 76.7%
44 High Street
West Nyack, New York 10994
Seymour Gussack............... 3,009,000(3)(4) 76.9%
David Gussack................. 3,015,300(3)(4) 77.1%
Nina M. Gussack............... 6,000(4) *
Robert E. Baruc............... 500 *
49
<PAGE>
Jerome Johnson............... 2,250 *
William Kurtz................. 200 *
All Directors and Executive
Officers as a Group.......... 3,023,250
* Less than 1%
(1) Pursuant to Rule 13d-3 under the U.S. Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or shared
investment power (including the power to dispose or direct the disposition) with
respect to a security whether through a contract, arrangement, understanding,
relationship or otherwise.
(2) Seymour I. Gussack, the Company's Chairman of the Board, David L. Gussack,
the Company's President and Nina Gussack, a Director of the Company own or
control approximately 19.6% and 17.6% and 17.6%, respectively, of the Common
Stock of World. The remaining children of Seymour I. Gussack and his spouse own
or control an additional approximately 23.5% of the stock of World. The estate
of Harold S. Geneen, a former Director of the Company, and Joseph J. Hoo, Vice
President -- Advanced Technology and China Affairs of the Company, own
approximately 19.6% and 2.0% of the Common Stock of World, respectively.
(3) Includes for each of Seymour I. Gussack and David L. Gussack, 3,000,000
shares beneficially owned by World. Seymour I. Gussack and David L. Gussack are
the two directors of World and each may be deemed to share with the other the
power to vote and dispose of the shares owned by that corporation. Seymour I.
Gussack and David L. Gussack disclaim beneficial ownership of the shares of
Common Stock owned by World.
(4) Includes 5,000 shares of Common Stock owned by Realty over which Seymour I.
Gussack, David L. Gussack, and Nina M. Gussack as general partners of Realty,
may be deemed to share the power to vote and dispose of. Each of Seymour I.
Gussack, David L. Gussack and Nina M. Gussack disclaim beneficial ownership of
the shares of Common Stock owned by Realty.
Item 13. Certain Relationships and Related Transactions
BANKRUPTCY AND RESULTING OBLIGATIONS TO WORLD
In connection with the Plan of Reorganization, the Company issued to
World, which prior to this Offering owned all of the Company's Common Stock, a
Secured Note for $2.5 million, an Installment Note for $750,142, and 1,000
shares of Common Stock (3,000,000 shares after giving effect to the 3000-for-one
stock split effective October 10, 1996) in exchange for the discharge of an
obligation World acquired for approximately $2.0 million from Wells Fargo, which
provided financing for the purchase by the Company in March 1987 of Hyatt and
for working capital. The
50
<PAGE>
Secured Note is secured by a subordinated lien in certain machinery and
equipment having a net book value of approximately $729,000 at December 27,
1997. 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 made a payment of $1.5 million of principal in 1997 with
respect to the Secured Note and it has accrued $547,500 in interest thereon. The
Installment Note does not bear interest.
LEASES WITH REALTY
The Company leases a facility located at West Nyack, New York comprising
189,833 square feet owned by Realty, whose partners include Seymour I. Gussack,
David L. Gussack and Nina M. Gussack, each a member of the Board of Directors of
the Company. The Company and Realty entered into the Lease effective as of
November 1, 1996, which provides for an initial term expiring on October 31,
2003, renewable at the option of the Company for an additional six year term.
The Company pays rent of $4.81 per square foot (or $912,840) annually, payable
in monthly rent payments of $76,070. Although the Company has not obtained a
formal appraisal, based upon an informal survey conducted by a real estate
broker, the Company believes that the rent charged it by Realty approximates
fair market rents in the area. The Lease provides for an increase every other
year, commencing in 1998, to the greater of: (i) 106% of the next preceding
year's rent; or (ii) the preceding year's rent multiplied by a fraction the
numerator of which is the CPI for the area including Rockland County or if no
such index is published, for Northern New Jersey in effect 90 days prior to
November 1 of the new rent year and the denominator of which is the CPI in
effect 90 days prior to November 1 of the preceding year.
The Company is the guarantor with respect to a mortgage loan currently in
the principal amount of $596,593 from the Job Development Authority of Rockland
County and a mortgage loan currently in the principal amount of $450,000 from
the Industrial Development Authority of Rockland County on the property in
Blauvelt, New York. These mortgage loans were created for the purpose of
building a facility in 1983 which the Company subsequently occupied for 12 years
until 1996.
SUBLEASES TO WMW MACHINERY CO. AND WORLD
The Company currently subleases 30,949 square feet and 5,500 square feet
at the West Nyack facility to WMW Machinery Co., a subsidiary of World, and
World, respectively, pursuant to subleases in each case effective November 1,
1996. The subleases are coterminous with the Lease. The sublease with WMW
Machinery Co. provides for rent of $5.50 square feet or $170,220 per year until
November 1998, payable to the Company in equal monthly installments. The
sublease with World provides for rent of $33,000 per year until November 1998,
payable to the Company in equal monthly installments. Each sublease provides for
an increase in rent every other year, commencing in 1998, to the greater of: (i)
106% of the next preceding year's rent; or (ii) the preceding year's rent
multiplied by a fraction the numerator of which is the CPI in effect 90 days
prior
51
<PAGE>
to November 1 of the next rent year and the denominator of which is the CPI in
effect 90 days prior to November 1 of the preceding year.
OTHER TRANSACTIONS WITH WORLD AND WORLD AFFILIATES
The Company made payments for and advances to World, World subsidiaries
and joint ventures and certain affiliates for payroll, benefits and other
expenses. Such payments aggregated approximately $1,102,000 for 1997. The
advances bear interest at the rate of 8% per annum which is accrued monthly. In
certain cases, the obligation to repay advances made by the Company were
satisfied by offsetting the price of bearings or bearing products purchased from
joint ventures obligated to the Company. The Company has purchased bearings from
four joint ventures and machinery from another joint venture in which World has
interests. Such purchases aggregated $4,277,000 for 1997. 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 prior to December 31, 1997;
plus any additional capital contributions made and administrative expenses
incurred on behalf of the joint venture by World after such date.
TAX SHARING AGREEMENT
The Company has been, and will be, included in the consolidated federal
income tax returns filed by World during all periods in which it has been or,
will be, a wholly-owned subsidiary of World ("Affiliation Years"). Upon the
completion of the IPO, the Company ceased to be included in the consolidated
federal income tax returns filed by World, and will file on a separate basis. As
a result, the Company and World have entered into an agreement ("Tax Sharing
Agreement") providing for the manner of determining payments with respect to
federal income tax liabilities and benefits arising during the Affiliation
Years. Under the Tax Sharing Agreement, the Company has paid, or will pay, to
World an amount equal to the Company's share of World's consolidated federal
income tax liability, generally determined on a separate return basis, for the
tax years which have ended and the portion of the tax year preceding
consummation of the IPO, 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
52
<PAGE>
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
Securities Act of 1933, as amended ("the Act") of shares of Common Stock owned
by it ("Registrable Shares"). Such rights will be exercisable by any person or
entity (together with World, "Holders") acquiring Registrable Shares from World,
including any options, warrant to purchase, or other security exchangeable for
or convertible into Registrable Shares other than pursuant to an effective
registration statement under the Act. If the Company proposes to register any
securities under the Act (other than a registration on Form S-4 or Form S-8),
whether or not for its own account, the Holders are entitled to include
Registrable Shares, subject to the right of the managing underwriter of any such
offering to exclude, due to market conditions, some or all of such Registrable
Shares from such registration. In addition, commencing February 7, 1998, the
Holders will have the right to require the Company to prepare and file
registration statements under the Act with respect to the Registrable Shares.
The right may be requested by any Holder holding Registrable Shares aggregating
at least 50,000 shares of the Company's Common Stock outstanding at the date of
the Company's Initial Public Offering. The Company generally is required to bear
the expenses (except underwriting discounts and commissions and fees and
expenses of separate counsel) of all such registrations, whether or not
initiated by any Holder.
53
<PAGE>
PART IV
Item 14. Financial Statements, Financial Statement Schedules, Exhibits and
Reports on Form 8-K
(a) 1. Financial Statements (included in Part II of this report):
Report of Independent Certified Public Accountants dated February
28, 1998.
Consolidated Balance Sheets for years ended December 28, 1996 and
December 27, 1997
Consolidated Statements of Operations for years ended December 30,
1995, December 28, 1996 and December 27, 1997.
Consolidated Statement of Changes in Stockholders' Equity at,
December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statement of Cash Flows for year ended December 30,
1995, December 28, 1996 and December 27, 1997.
Summary of Significant Accounting Policies and Notes to Consolidated
Financial Statements.
(a) 2. Financial Statement Schedules (included pursuant to Item 14(d) at page 42
of this report):
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 54, filed
pursuant to Item 14(c). The Exhibits include the following
management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report: 1996 Stock Option and
Performance Award Plan.
(b) Reports on Form 8-K:
On October 24, 1997, the Company filed a Report on Form 8-K, dated
October 21, 1997, reporting the dismissal of Ferro, Berdon &
Company, LLP, and the reinstatement of B D O Seidman, LLP, as the
Company's principal independent accountant.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 25, 1998.
GENERAL BEARING CORPORATION
By: /s/ David L. Gussack
-------------------------------
David L. Gussack, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on March 25, 1998.
Signatures Title Date
---------- ----- ----
/s/ Seymour I. Gussack Chairman of the Board of March 25, 1998
- ---------------------------- Directors ---------------
Seymour I. Gussack
/s/ David L. Gussack President and Director March 25, 1998
- ---------------------------- (Principal Executive Officer) ---------------
David L. Gussack
/s/ Christopher Moore Vice President Finance March 25, 1998
- ---------------------------- (Principal Financial and ---------------
Christopher Moore Accounting Officer)
/s/ Jerome Johnson Director March 25, 1998
- ---------------------------- ---------------
Jerome Johnson
/s/ Nina Gussack Director March 25, 1998
- ---------------------------- ---------------
Nina Gussack
/s/ Peter Barotz Director March 25, 1998
- ---------------------------- ---------------
Peter Barotz
/s/ Robert E. Baruc Director March 25, 1998
- ---------------------------- ---------------
Robert E. Baruc
55
<PAGE>
EXHIBIT INDEX
NOTE: Except as to those items marked with an "*", which are filed herewith, all
Exhibits have been previously filed with the Company's Registration Statement on
Form S-1 effective February 7, 1997 (Registration No. 333-15477), or the
Company's Annual Report on Form 10-K for fiscal year 1996.
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Second Restated Certificate of Incorporation
3.2 By-Laws of the Company
4.1 Specimen Stock Certificate
10.1 Loan and Security Agreement dated December
20, 1993 by and among the Bank of New York
Commercial Corporation, the Company and
Hyatt Railway Products Corp., including
amendments 1 through 8 thereto
10.2 Contract dated June 1988 by and between Shanghai Rolling Bearing
Factory and the Company, including Agreement for the Revision and
Amendment to the Contract
10.3 Lease Agreement dated November 1, 1996 by and between Gussack
Realty Company and the Company relating to West Nyack, New York
premises
10.4 Lease dated March 15, 1988 by and between
Lamington Associates II and the Company
relating to the Union, New Jersey premise
10.5 Sublease Agreement dated November 1, 1996 between the Company and
World Machinery Company
10.6 Sublease Agreement dated November 1, 1996 between the Company and
WMW Machinery Co.
10.9 1996 Stock Option and Performance Award Plan
10.10 Form of Representative's Warrant
10.11 Form of Registration Rights Agreement between the Company and World
(previously filed exhibit as 4.2)
10.12 Form of Tax Sharing and Indemnification Agreement between the
Company and World Machinery Company
10.13 Amendment Letter dated March 7, 1997 between the Company and Bank
of New York Commercial Corporation
21 List of Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants*
27 Financial Data Schedule*
56
Consent of Independent
Certified Publice Accountants
General Bearing Corporation
West Nyack, New York
We hereby consent to the incorporation by reference in the Registration
Statement of General Bearing Corporation on Form S-8 filed January 16, 1998 of
our report dated February 28, 1998, except for the third paragraph of Note 14(d)
which is as of March 17, 1998, relating to the consolidated financial statements
of General Bearing Corporation appearing in the Company's Annual Report on Form
10-K for the year ended December 27, 1997.
/s/ BDO Seidman, LLP
- -----------------------
BDO Seidman, LLP
March 27, 1998
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 118
<SECURITIES> 0
<RECEIVABLES> 5,708
<ALLOWANCES> 235
<INVENTORY> 11,747
<CURRENT-ASSETS> 20,395
<PP&E> 4,887
<DEPRECIATION> 2,500
<TOTAL-ASSETS> 26,802
<CURRENT-LIABILITIES> 11,460
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 14,393
<TOTAL-LIABILITY-AND-EQUITY> 26,802
<SALES> 42,153
<TOTAL-REVENUES> 42,153
<CGS> 29,090
<TOTAL-COSTS> 29,090
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<INTEREST-EXPENSE> 852
<INCOME-PRETAX> 3,246
<INCOME-TAX> (2,100)
<INCOME-CONTINUING> 5,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,346
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.38
</TABLE>
