<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 0-23486
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NN BALL & ROLLER, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Tennessee Road
Erwin, Tennessee 37650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 743-9151
------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
---------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The number of shares of the registrant's common stock outstanding on March
25, 1998 was 14,804,271.
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 25, 1998, based on the closing price on the NASDAQ
National Market System on that date was approximately $111,650,143.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
<PAGE>
PART I
Item 1 Business
Overview
NN Ball & Roller, Inc. (the "Company") is an independent manufacturer and
supplier of high quality, precision steel balls and rollers to both domestic and
international anti-friction bearing manufacturers. The Company also supplies
high quality, precision steel balls and rollers, both directly and indirectly
through its sales to bearing manufacturers, to automotive original equipment
manufacturers ("OEMs") and the automotive aftermarket, to the gas and mining
industries, and to producers of water, gas and oil well drilling bits and
stainless steel valves and pumps. Precision steel balls and rollers are critical
moving parts of anti-friction bearings which, in turn, are integral components
of machinery with moving parts.
The Company was organized in October 1980 by a group of senior managers of
the ball and roller division of Hoover Precision Products, Inc. (formerly Hoover
Universal, Inc.), led by Richard Ennen, the Company's Chairman. The Company was
founded in order to meet the bearings industry's need for a dependable source of
high quality, precision balls and rollers. During 1997, the Company sold its
products to over 440 customers located in 29 different countries, and its
primary customers included FAG Bearings Corporation ("FAG"), SKF Bearing
Industries ("SKF") and the Torrington Company.
Products
At its facilities in Erwin, Tennessee, Walterboro, South Carolina, Mountain
City, Tennessee, and at its new facility in Kilkenny, Ireland, the Company
produces high quality, precision steel balls in sizes ranging in diameter from
3/16 of an inch to 2 inches and rollers in a limited variety of sizes. The
Company produces balls in a variety of grades ranging from grade 5 to grade 1000
and rollers in a variety of grades ranging from grade 50 to grade 1000. The
grade number for a ball or a roller indicates the degree of spherical or
cylindrical precision of the ball or roller; for example, grade 5 balls are
manufactured to within five millionths of an inch of roundness and grade 50
rollers are manufactured to within fifty millionths of an inch of roundness.
Sales of steel balls accounted for approximately 93%, 93% and 92% of the
Company's net sales in 1995, 1996 and 1997, respectively. Sales of rollers
accounted for the balance of the Company's net sales in such years.
In recent years, bearing manufacturers and automotive OEMs, responding to
customer demands for higher quality, have begun to focus on the production of
high precision, "quiet" bearings which allow equipment to run more smoothly and
quietly and require high precision components, including grade 5 and grade 10
balls. From 1992 to 1997, the percentage of high precision balls produced by
the Company for use in quiet bearing applications has increased from
approximately 54% to approximately 81% of total net ball sales.
Precision Steel Balls. The Company manufactures high quality, precision
balls in four different types of steel: 52100 steel, 440C stainless steel, S2
rock bit steel and 302 stainless steel. Each of the different types of steel
has unique characteristics that make it suitable for particular applications.
During 1997, approximately 96% of the balls produced by the Company were
made from 52100 steel ("52100 Steel"). See also "Business -- Raw Materials."
The 52100 Steel balls have a high degree of hardness and provide excellent
resistance to wear and deformation. The 52100 Steel balls are used primarily by
manufacturers of anti-friction ball bearings where precise spherical and
tolerance accuracy are required. The Company produces 52100 Steel balls in ten
grades ranging from grade 1000 to grade 5 (highest precision), and in sizes
ranging in diameter from 3/16 of an inch to 2 inches. The primary grades of the
52100 Steel balls are grade 16, grade 10 and grade 5.
Balls produced from 440C stainless steel offer substantial
corrosion-resistant properties and are used primarily in pumps and valves
because they are especially resistant to such corrosives as fresh water, crude
oil,
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gasoline, alcohol and food products. Balls produced from S2 rock bit steel have
a ground and polished finish as well as the toughness and strength necessary for
severe shock loads. Balls produced from S2 rock bit steel are most frequently
used in mining and oil field equipment and offshore drilling operations. Balls
produced from 302 stainless steel are long lasting and corrosion resistant
special material balls. Typical applications for balls produced from 302
stainless steel include beer tap valves, mechanical pump spraying, medical
equipment, dairy machines and food processing equipment.
Precision Steel Rollers. The Company manufactures rollers in three types
of steel: 52100 Steel, 440C stainless steel and S2 rock bit steel. Rollers are
the primary components of anti-friction bearings which are subjected to heavy
load conditions. The Company's roller products are used primarily for
applications similar to those of its ball product lines, with the addition of
hydraulic pumps and motors.
Sales and Marketing
The Company markets its products in the United States and abroad primarily
through three salaried sales employees. Four additional internal sales
employees handle customer orders and provide sales support.
The following table presents a breakdown of the Company's net sales for
fiscal years 1993 through 1997:
<TABLE>
<CAPTION>
NET SALES
-----------------------------------------------------
(IN THOUSANDS)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Domestic:
Bearing Manufacturers..................... $ 30,160 $ 28,894 $ 26,764 $ 24,195 $ 19,076
40% 34% 34% 40% 44%
Other..................................... 10,158 13,549 12,533 13,912 10,861
13% 16% 16% 23% 25%
Foreign:
Bearing Manufacturers..................... 32,820 38,264 35,279 20,566 12,933
44% 45% 46% 34% 30%
Other..................................... 2,114 3,832 3,210 1,814 655
3% 5% 4% 3% 1%
--------- --------- --------- --------- ---------
Total..................................... $ 75,252 $ 84,539 $ 77,786 $ 60,487 $ 43,525
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The Company's marketing strategy is to increase its share of the
domestic and international market for bearing components by offering a wide
variety of high quality, precision balls and rollers to existing and prospective
customers on a timely basis and in a cost-effective manner. In marketing its
products, the Company has focused its efforts on bearing manufacturers with
their own ball or roller manufacturing divisions. The Company's sales staff
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emphasizes the potential quality advantages and cost savings associated with
the outsourcing of such bearing manufacturers' needs by purchasing precision
components from the Company instead of manufacturing such components
internally. For a breakdown of the Company's foreign sales in 1995, 1996 and
1997 by geographic region, see Note 11 of the Notes to Financial Statements.
The Company emphasizes sales to bearing manufacturers because sales in
this market historically have been less cyclical than sales to the OEM
automotive market. The Company's direct net sales to bearing manufacturers has
increased from approximately 71% of net sales in 1992 to approximately 84% in
1997. Although the Company's direct sales to OEMs have significantly decreased
in recent years, management believes that a significant but undeterminable
percentage of the balls and rollers sold by the Company to bearing manufacturers
are incorporated into products supplied to the OEM automotive market.
The Company's arrangements with its domestic customers typically
provide that payments are due within 30 days following the date of shipment of
goods. With respect to foreign customers (other than foreign customers that
participate in the Company's inventory management program), payments generally
are due within either 90 to 120 days following the date of shipment in order to
allow for additional freight time and customs clearance. For customers that
participate in the Company's inventory management program, sales are recorded
when the product is used by the customer, and payments typically are due 30 days
thereafter. See "Business -- Customers" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Customers
During 1997, the Company sold its products to more than 440 customers
located in 29 different countries. Approximately 47% of the Company's net sales
in 1997 were to international customers. See Note 10 of the Notes to Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations." In both the foreign and
domestic markets, the Company principally sells its products directly to
manufacturers and not to distributors.
During 1997, the Company's ten largest customers accounted for
approximately 77% of its net sales. Sales to various U.S. and foreign divisions
of SKF, which is one of the largest bearing manufacturers in the world,
accounted for approximately 37% of net sales in 1997 and sales to FAG accounted
for approximately 10% of net sales in 1997. None of the Company's other
customers accounted for more than 10% of its net sales in 1997; however, sales
to the Torrington Company, and Hanwha International each represented more than
5% of the Company's net sales during the period.
The Company currently negotiates and contracts with various purchasing
units within SKF and believes that, in certain respects, such units operate
independently with respect to purchasing decisions. There can be no assurance,
however, that SKF will not centralize purchasing decisions in the future.
The Company ordinarily ships its products directly to customers within
60 days, but in some cases, in the same calendar month, of the date on which a
sales order is placed. Accordingly, the Company generally has an insignificant
amount of open (backlog) orders from customers at month end. Certain of the
Company's customers have entered into contracts with the Company pursuant to
which they have agreed to purchase all of their requirements of specified balls
and rollers from the Company, but under which they are not obligated to purchase
any specific amounts. While firm orders generally are received only monthly,
the Company normally is aware of reasonably anticipated future orders well in
advance of the placement of a firm order. The Company has installed a
computerized, bar coded inventory management system with most of its major
customers pursuant to which the Company, through a direct computer link,
automatically monitors the customers' ball and roller inventories. This system
permits the Company to determine on a day-to-day basis the amount of balls
and/or rollers remaining in a customer's inventory. When such inventories fall
below certain levels, the Company automatically ships additional goods. The
Company follows industry practice in handling its inventory, which is a first
in, first out policy.
<PAGE>
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Employees
As of December 31, 1997, the Company had 444 full-time employees of
whom 369 were engaged in production/maintenance. No employee of the Company is
represented by a union. The Company believes that relations with its employees
are good.
Competition
The precision ball and roller industry is highly competitive, and many
of the Company's competitors have substantially greater financial resources than
the Company. The Company's primary domestic competitor is Hoover Precision
Products, Inc., a division of Tsubakimoto Precision Products Co. Ltd. The
Company's primary foreign competitors are Amatsuji Steel Ball Manufacturing
Company, Ltd. and Tsubakimoto Precision Products Co. Ltd. The Company's ability
to compete with foreign-based competitors could be adversely affected by an
increase in the value of the United States dollar relative to foreign
currencies.
The Company believes that competition within the precision ball and
roller market is based principally on quality, price and the ability to
consistently meet customer delivery requirements. Management believes that the
Company's competitive strengths are its precision manufacturing capabilities,
its reputation for consistent quality and reliability, and the productivity of
its workforce. In addition, management believes that the Company's independence
and sole focus on the production of balls and rollers is an advantage when
selling to bearing manufacturers that may be reluctant to do business with a
potential competitor. In recent years, certain bearing manufacturers with
captive ball and roller manufacturing divisions, including American NTN Bearing
Manufacturing Corporation and divisions of SKF based in Sweden, Brazil and
Mexico, have turned to the Company as a source of supply.
Raw Materials
The primary raw material used by the Company is 52100 Steel. During
1997, approximately 96% of the steel used by the Company was 52100 Steel. The
Company's other steel requirements include type 440C stainless steel, type S2
rock bit steel and type 302 stainless steel. The Company purchases
substantially all of its 52100 Steel requirements from foreign mills because of
the lack of domestic producers of such steel at the quality level the Company
requires. The other steel requirements of the Company also are purchased
principally from foreign steel manufacturers.
The Company allocates its steel purchases among suppliers on the basis
of price and quality. Generally, the Company does not enter into written supply
agreements with its suppliers or commit itself to maintain minimum monthly
purchases of steel. The Company's pricing arrangements with its suppliers
typically are subject to adjustment once every six months.
Because 52100 Steel principally is produced by foreign manufacturers,
the Company's operating results would be negatively affected in the event that
the U.S. government imposes any significant quotas, tariffs or other duties or
restrictions on the import of such steel or if the United States dollar
decreases in value relative to foreign currencies.
Patents, Trademarks and Licenses
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 and processes, including trade secrets and know-how, and the success of its
business depends, to some extent, on such information remaining confidential.
Each executive officer of the Company is subject to a non-competition and
confidentiality agreement that seeks to protect this information.
<PAGE>
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Seasonal Nature of Business
The Company's business historically has not been of a seasonal
nature. However, as foreign sales have increased as a percentage of total
sales, seasonality has become a factor for the Company in that some foreign
customers typically cease their production activities during the month of
August.
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. The Company maintains a compliance program
to assist in preventing and, if necessary, correcting environmental problems.
Based on information compiled to date, management believes that the Company's
current operations are in substantial compliance with applicable environmental
laws and regulations, the violation of which would have a material adverse
effect on the Company. There can be no assurance, however, that currently
unknown matters, new laws and regulations, or stricter interpretations of
existing laws and regulations will not materially affect the Company's business
or operations in the future. More specifically, although management believes
that the Company disposes of its wastes in material compliance with applicable
environmental laws and regulations, there can be no assurance that the Company
will not incur significant liabilities in the future in connection with the
clean-up of waste disposal sites.
The Company has incurred certain expenses in complying with applicable
environmental laws associated with the removal of four underground storage tanks
containing kerosene and waste oil, the remediation of soil and groundwater
contamination resulting from a leak in one of the tanks, and the closing of a
sludge disposal area. The remediation project is largely complete, but the
Company has certain ongoing monitoring responsibilities. The amounts expended
by the Company in connection with this remediation project have not been
material, and based upon information currently available to the Company,
management does not believe that the future costs associated with the project
will have a material adverse effect on the Company's results of operations or
financial condition.
<PAGE>
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Executive Officers of the Registrant
The executive officers of the Company consist of the following
persons:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Richard D. Ennen................ 70 Chairman of the Board and Director
Roderick R. Baty................ 44 President, Chief Executive Officer and Director
William C. Kelly, Jr............ 39 Treasurer, Assistant Secretary and Chief Accounting Officer
Frank T. Gentry, III............ 42 Vice President--Roller Manufacturing & Materials
Charles L. Edmisten............. 51 Vice President
Charles E. Bailey............... 39 Vice President--Marketing and Sales
</TABLE>
Biographical Information. Set forth below is certain additional
information with respect to each executive officer of the Company.
Richard D. Ennen is the principal founder of the Company and has been
the Chairman of the Board and a director of the Company since its formation in
1980. He served as Chief Executive Officer of the Company from its inception
until 1997 and as President of the Company from its inception until 1990. In
recent years, Mr. Ennen has focused on the development and implementation of the
Company's business strategy, rather than the day-to-day operations of the
Company. Prior to forming the Company, Mr. Ennen held various management and
executive positions with Hoover Precision Products, Inc. (formerly Hoover
Universal, Inc.), a division of Tsubakimoto Precision Products Co. Ltd,
including Corporate Vice President and General Manager of the ball and roller
division. Mr. Ennen has over 40 years of experience in the anti-friction
bearing industry.
Roderick R. Baty became President and Chief Executive Officer in July
1997. He joined the Company in July 1995 as Vice President and Chief Financial
Officer and was elected to the Board of Directors in 1995. Prior to joining the
Company, Mr. Baty served as President and Chief Operating Officer of Hoover
Precision Products from 1990 until January 1995, and as Vice President and
General Manager of Hoover Precision Products from 1985 to 1990.
William C. Kelly, Jr. joined the Company in 1993 as Assistant
Treasurer and Manager of Investor Relations. In July 1994, Mr. Kelly was
elected to serve as the Company's Chief Accounting Officer, and in February
1995, was elected Treasurer and Assistant Secretary. Prior to joining the
Company, Mr. Kelly served from 1988 to 1993 as a Staff Accountant and as a
Senior Auditor with the accounting firm of Price Waterhouse LLP.
Frank T. Gentry, III, was appointed Vice President -- Roller
Manufacturing & Materials in October 1996. Mr. Gentry's responsibilities
include purchasing, inventory control and transportation. Mr. Gentry joined the
Company in 1981 and held various production control positions within the Company
from 1981 to August 1995. From August 1995 to October 1996, Mr. Gentry held the
position of Vice President -- Manufacturing.
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Charles L. Edmisten has served as a Vice President of the Company
since 1980. Mr. Edmisten's responsibilities include engineering and process
development. Prior to joining the Company, Mr. Edmisten served in various
positions with Hoover Precision Products, Inc., including Chief Engineer.
Charles E. Bailey was appointed Vice President -- Marketing and Sales
in February 1998. Mr. Bailey's responsibilities include global and domestic
marketing, sales management, and customer responsiveness. Prior to joining the
Company, Mr. Bailey was the Vice President of Marketing and Product Development
for the Jacobs Chuck Division of the Danaher Corporation, where he worked from
1991 to 1997.
Executive officers are elected annually at the time of the Annual
Meeting and serve one-year terms and until their successors are elected and
qualified.
Item 2 Properties
The Company has four manufacturing facilities located, respectively,
in Erwin, Tennessee, Walterboro, South Carolina, Mountain City, Tennessee and
Kilkenny, Ireland. The Company leased the Mountain City facility from the State
of Tennessee in September 1995 in order to expand production capacity to meet
the increasing worldwide demand for its products. The Company purchased the
land and building at the facility in January 1997. Production began in early
1996 at the Mountain City facility. The Company established the Kilkenny,
Ireland facility in August 1997 to better meet the needs of its customers in
Europe. Production began in September 1997.
The Erwin, Walterboro, Mountain City and Kilkenny plants currently
have approximately 125,000, 100,000, 48,000 and 66,000 square feet of
manufacturing space, respectively. The Walterboro plant is located on a 10 acre
tract of land owned by the Company, the Erwin plant is located on a 12 acre
tract of land owned by the Company, the Mountain City plant is located and on an
8 acre tract of land owned by the Company and the Kilkenny facility is located
on a 2 acre tract of land owned by the Company. During 1996, the Company added
new machinery and equipment at the Erwin, Walterboro and Mountain City
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company believes that the Erwin, Walterboro, Mountain City and
Kilkenny plants are adequately suited for the Company's current production and
business needs.
At the time of the Company's initial public offering of the
Company's stock in March 1994, the Erwin and Walterboro facilities were
subject to a deed of trust and mortgage, respectively, that secured the
Company's 10.88% Senior Secured Notes. The Senior Notes were repaid in full
with a portion of the net proceeds of the initial public offering. At the
current time, none of the Company's properties are pledged to secure any
loans to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 3 Legal Proceedings
All legal proceedings and actions involving the Company are of an
ordinary and routine nature and are incidental to the operations of the
Company. Management believes that such proceedings should not, individually
or in the aggregate, have a material adverse effect on the Company's business
or financial condition or on the results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of stockholders during the fourth
quarter of 1997.
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Part II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
Since the Company's initial public offering in 1994, the Common Stock
has been traded on the Nasdaq National Market under the trading symbol "NNBR."
Prior to such time there was no established market for the Common Stock. As of
March 25, 1998, there were 233 holders of record of the Common Stock.
The following table sets forth the high and low sale prices of the
Common Stock, as reported by Nasdaq, and the dividends paid per share on the
Common Stock during each calendar quarter of 1996 and 1997. See Note 3 of the
Notes to Financial Statements.
<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW DIVIDEND
--------- --------- -----------
<S> <C> <C> <C>
1996
First Quarter.................... 22 3/4 17 1/2 0.08
Second Quarter................... 26 3/4 20 3/8 0.08
Third Quarter.................... 21 1/4 13 7/8 0.08
Fourth Quarter................... 16 12 3/8 0.08
1997
First Quarter.................... 15 3/8 10 3/8 0.08
Second Quarter................... 12 3/4 9 7/8 0.08
Third Quarter.................... 13 1/4 9 1/2 0.08
Fourth Quarter................... 11 1/2 8 0.08
</TABLE>
The declaration and payment of dividends are subject to the discretion
of the Board of Directors of the Company and depend upon the Company's
profitability, financial condition, capital needs, future prospects and other
factors deemed relevant by the Board of Directors. The terms of the Company's
revolving credit facility restrict the payment of dividends by prohibiting the
Company from declaring or paying any dividend if an event of default exists at
the time of, or would occur as a result of, such declaration or payment. For
further description of the Company's revolving credit facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Item 6 Selected Financial Data
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the Financial Statements and
the Notes thereto included as Item 8. The data set forth below as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, have been derived from the Financial Statements of the Company which
have been audited by Price Waterhouse LLP, independent accountants, whose
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report thereon is included as part of Item 8. The financial data as of
December 31, 1995, 1994 and 1993, and for the year ended December 31, 1993
also were derived from financial statements of the Company which have been
audited by Price Waterhouse LLP (except for the pro forma statement of income
data). These historical results are not necessarily indicative of the
results to be expected in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales.......................................... $ 75,252 $ 84,539 $ 77,786 $ 60,487 $ 43,525
Cost of products sold.............................. 51,707 56,695 53,912 40,110 29,762
--------- --------- --------- --------- ---------
Gross profit....................................... 23,545 27,844 23,874 20,377 13,763
Selling, general and administrative expenses....... 5,518 4,890 4,249 3,439 2,621
Depreciation....................................... 4,106 3,358 2,364 1,996 1,868
--------- --------- --------- --------- ---------
Income from operations............................. 13,921 19,596 17,261 14,942 9,274
Interest expense................................... 29 296 42 354 1,382
--------- --------- --------- --------- ---------
Income before provision for income taxes and
extraordinary item............................... 13,892 19,300 17,219 14,588 7,892
Provision for income taxes (1)..................... 5,382 6,835 5,708 5,704 236
Income before extraordinary item................... 8,510 12,465 11,511 8,884 7,656
Extraordinary loss from early extinguishment of
debt (net of income tax benefit of $710) (2)..... -- -- -- (1,160) --
--------- --------- --------- --------- ---------
Net income......................................... $ 8,510 $ 12,465 $ 11,511 $7,724 $ 7,656
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share:
Income before extraordinary item................... $ 0.57 $ .83 $ .79 $ .65
Extraordinary item, net (2)........................ -- -- -- (.09)
--------- --------- --------- ---------
Net income per share (assuming dilution) (3)....... $ 0.57 $ .83 $ .79 $ .56
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends declared................................. $ .32 $ .32 $ .20 $ .07
--------- --------- --------- ---------
--------- --------- --------- ---------
Number of shares outstanding (3)................... 14,804 15,042 14,583 13,716
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Pro Forma Statement of Income Data (4):
Income before provision for income taxes and extraordinary
item..................................................... $ 14,588 $ 7,892
Provision for income taxes................................. 5,543 2,999
--------- ---------
Income before extraordinary item........................... 9,045 4,893
Extraordinary item, net (2)................................ (1,160) --
--------- ---------
Net income................................................. $ 7,885 $ 4,893
--------- ---------
--------- ---------
Net income per share:
Income before extraordinary item........................... $ .66 $ .44
Extraordinary item, net (2)................................ (.09) --
--------- ---------
Net income per share (3)................................... $ .57 $ .44
--------- ---------
--------- ---------
Weighted average number of shares outstanding (3).......... 13,716 11,016
--------- ---------
--------- ---------
Balance Sheet Data:
Current assets............................................. $ 26,185 $ 26,727 $ 26,728 $ 21,591 $ 13,971
Current liabilities........................................ 7,471 8,374 13,303 4,845 7,859
Total assets............................................... 63,273 59,292 54,241 36,936 26,215
Long-term debt (less current portion)...................... -- -- -- -- 10,000
Stockholders' equity....................................... 52,971 48,710 39,218 30,537 8,184
</TABLE>
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(1) During the period from the inception of the Company through the
consummation of its initial public offering in March 1994, the Company was
treated for income tax purposes as an S corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended, and under comparable tax
laws of certain states. As a result, earnings of the Company during that
period were taxed for federal and certain state income tax purposes
directly to the Company's stockholders, rather than to the Company. Upon
the termination of the Company's S corporation status, in addition to
becoming subject to corporate tax at the federal level and in a number of
states, the Company was required to provide for deferred federal and state
income taxes, calculated in accordance with the Financial Accounting
Standards Board Statement 109, "Accounting for Income Taxes" ("FAS 109"),
for the cumulative temporary differences between the financial reporting
and income tax bases of the Company's assets and liabilities, resulting in
a charge to the provision for income taxes in the amount of $1,213,000 in
1994. See Note 12 of the Notes to Financial Statements.
(2) The Company used a portion of its net proceeds from the initial public
offering to prepay the $12,000,000 in principal of the Company's 10.88%
Senior Secured Notes and related accrued interest of $653,000. This
prepayment resulted in an extraordinary after tax loss of $1,160,000, net
of related income tax benefit of
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$710,000. The gross extraordinary loss included a prepayment penalty of
$1,728,000 and the write-off of unamortized deferred loan costs of
$142,000.
(3) The actual and pro forma net income per share data is based on the
historical weighted average number of shares outstanding, as adjusted to
reflect (i) a Common Stock split of 508-for-one in connection with a
reincorporation merger transaction completed in January 1994, (ii) the
3-for-2 split of the Common Stock effected on March 5, 1995, and (iii) the
3-for-2 split of the Common Stock effected on December 5, 1995. In
addition, the weighted average number of shares outstanding used to compute
earnings per share as of December 31, 1993, has been adjusted to include
the estimated number of shares (464,000 shares as calculated at the initial
public offering price and prior to adjustment for the stock dividends paid
in 1995) required to be sold by the Company to pay, as of December 31,
1993, the distribution made to the Company's S corporation stockholders
upon the consummation of the initial public offering. See Note 3 of the
Notes to Financial Statements.
(4) The pro forma statement of income data for 1993 and 1994 is based on
historical net income, as adjusted to reflect a provision for income taxes
(at an assumed effective rate of 38%), as if the Company had been a C
corporation since its inception. The pro forma statement of income data
was calculated using the criteria established under FAS 109, which requires
the use of an asset and liability approach to financial reporting and
accounting for income taxes. The 1994 pro forma provision for income taxes
does not include the $1,213,000 charge related to the Company's termination
of its S corporation status as discussed in note (1) above. See Note 12 of
the Notes to Financial Statements.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this Form 10-K. Historical
operating results and percentage relationships among any amounts included in the
Financial Statements are not necessarily indicative of trends in operating
results for any future period.
Overview
The Company's core business is the manufacture and sale of high quality,
precision steel balls and rollers. In 1997, balls accounted for
approximately 92% of the Company's net sales, while rollers accounted for the
remaining 8%. Although all of the Company's net sales from 1980 through 1986
were exclusively to domestic customers, the Company's international sales
have increased significantly since then and represented approximately 47% of
net sales in 1997. See Note 11 of the Notes to Financial Statements. Sales
declined in 1997, primarily due to reduced international sales.
Significant factors in the Company's growth since its founding include its
displacement of captive ball manufacturing divisions of domestic and
international bearing manufacturers as a source of precision balls and increased
sales of high precision balls for quiet bearing applications. From 1992 through
1997, the percentage of high precision balls produced by the Company for use in
quiet bearing applications has increased from approximately 54% to approximately
81% of total net ball sales. Management believes that the Company's sales
growth since 1992 is due to its ability to capitalize on opportunities in
overseas markets and provide precision balls at competitive prices, as well as
its emphasis on product quality and customer service. The sales decline in 1997
was due in large part to economic conditions in Europe and Asia and a decline in
outsourcing by certain captive producers.
<PAGE>
-13-
Results of Operations
The following table sets forth for the periods indicated selected financial
data and the percentage of the Company's net sales represented by each income
statement line item presented.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net sales.......................................................... 100.0% 100.0% 100.0%
Cost of products sold.............................................. 68.7 67.1 69.3
--------- --------- ---------
Gross profit....................................................... 31.3 32.9 30.7
Selling, general and administrative expenses....................... 7.3 5.8 5.5
Depreciation....................................................... 5.5 4.0 3.0
--------- --------- ---------
Income from operations............................................. 18.5 23.1 22.2
Interest expense................................................... 0 .3 .1
--------- --------- ---------
Income before provision for income taxes and extraordinary item.... 18.5 22.8 22.1
Provision for income taxes......................................... 7.2 8.1 7.3
--------- --------- ---------
Income before extraordinary item................................... 11.3 14.7 14.8
--------- --------- ---------
Net income......................................................... 11.3% 14.7% 14.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Year Ended December 31, 1997 Compared in the Year Ended December 31, 1996
Net Sales. The Company's net sales decreased $9.3 million, or 11.0%, from
$84.5 million in 1996 to $75.3 million in 1997. Foreign net sales decreased
$7.2 million, or 17.1%, from $42.1 million in 1996 to $34.9 million in 1997.
The decrease in foreign net sales was due primarily to decreased sales volumes
with existing customers, largely because of a decline in outsourcing of captive
production by certain of the Company's customers (including, as previously
announced by the Company, one of the Company's major customers bringing in house
a portion of its business that was previously outsourced to the Company) and
general economic conditions in Europe and Asia. Domestic net sales decreased
$2.1 million, or 5.0%, from $42.4 million in 1996 to $40.3 million in 1997.
This decrease was primarily due to decreased sales to existing customers.
Gross Profit. Gross profit decreased by $4.3 million, or 15.4% from $27.8
million in 1996 to $23.5 million in 1997. As a percentage of net sales, gross
profit decreased from 32.9% in 1996 to 31.3% in 1997. The decrease in gross
profit is due largely to costs related to the new facility start-up in Ireland
and costs associated with excess capacity resulting from decreased sales to some
existing customers.
<PAGE>
-14-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $628,000, or 12.8% to $5.5 million from
$4.9 million in 1996. This increase is due primarily to increased legal,
accounting and employee relocation expenses related to the Ireland facility
start-up, as well as increased consulting expenses related to the Company's
current strategic development process. As a percentage of net sales, selling,
general and administrative expenses increased to 7.3% in 1997 from 5.8% in 1996.
Depreciation Expense. Depreciation expense increased $748,000, or 22.3%,
to $4.1 million in 1997 from $3.4 million in 1996. This increase was due
primarily to capital expenditures associated with expansion of the Company's
existing facilities and the start-up of the Ireland facility. Also, new assets
added in 1996 related to the Mountain City facility were depreciated utilizing
the half-year convention in the prior year versus a full year of depreciation
taken in the current year. As a percentage of net sales, depreciation increased
to 5.5% in 1997 from 4.0% in 1996.
Interest Expense. Interest expense decreased $267,000, or 90.2%, from
$296,000 in 1996 to $29,000 in 1997. The decrease was due to decreased levels
outstanding under the Company's line of credit in 1997 as compared to 1996. See
"Management's Discussion and Analysis of Financial Condition -- Liquidity and
Capital Resources."
Net Income. Net income decreased $4.0 million, or 31.7% from $12.5 million
in 1996 to $8.5 million in 1997. As a percentage of net sales, net income
decreased to 11.3% in 1997 from 14.7% in 1996. The decrease in net income as a
percentage of net sales was due primarily to costs associated with the new
Ireland facility start-up, excess capacity at the Company's plants, increased
selling, general and administrative expenses and the increase depreciation
expense discussed above. In addition, the Company increased the provision for
income taxes due to the decrease in foreign sales as a percentage of total sales
and the anticipated decrease in the level of tax benefit from the Company's
participation in a shared foreign sales corporation.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995.
Net Sales. The Company's net sales increased by $6.7 million, or 8.7%, to
$84.5 million in 1996 from $77.8 million in 1995. Foreign net sales increased
$3.6 million, or 9.4%, to $42.1 million in 1996 from $38.5 million in 1995. The
increase in foreign net sales was due primarily to increased sales volumes with
existing customers, and to a lesser extent, sales to several new customers.
Domestic net sales increased $3.1 million, or 8.0%, to $42.4 million in 1996
from $39.3 million in 1995. This increase was due primarily to increased sales
to existing customers. Notwithstanding the Company's record sales in 1996, the
Company's foreign sales in the last half of 1996 were negatively affected by
weak international economies, certain customers' excess inventories and a
slowing in the overall rate of outsourcing of captive production. The Company
anticipates that its foreign sales will continue to be affected by one or more
of these negative factors in 1997. In addition, in the fourth quarter of 1996,
two of the Company's major customers have informed the Company of their
intention to bring in-house in 1997 a portion of their business (in the
aggregate, approximately $9.0 million in net sales) that was previously
outsourced to the Company. Management anticipates that the loss of these sales
in 1997 should be offset, at least partially, by additional sales to other
existing customers.
Gross Profit. Gross profit increased by $3.9 million, or 16.3%, to $27.8
million in 1996 from $23.9 million in 1995. As a percentage of net sales, gross
profit increased to 32.9% in 1996 from 30.7% in 1995. During 1995, gross profit
was adversely affected as a result of increased raw material costs resulting
from a steel shortage and inefficiencies associated with the steel shortage and
capacity constraints, including increased labor and transportation costs.
During the first quarter of 1996, the steel shortage abated and, in addition,
the Company brought additional capacity on-line with the addition of the
Mountain City, Tennessee facility which allowed for more efficient operations.
During the third quarter of 1996, the Company implemented a new financial
reporting software package which allowed for more efficient tracking and
controlling of costs. Additionally, during 1996, the Company recorded
approximately $700,000 of duty drawback associated with 1995 and 1996 imports of
raw material which had not been previously recorded. This amount is an offset
to export fees paid.
<PAGE>
-15-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $641,000 or 15.1%, to $4.9 million from
$4.2 million in 1995. The increase was due primarily to increased salaries and
wages. As a percentage of net sales, selling, general and administrative
expenses increased slightly to 5.8% in 1996 from 5.5% in 1995.
Depreciation Expense. Depreciation expense increased $994,000, or 42.0%,
to $3.4 million in 1996 from $2.4 million in 1995. This increase was due
primarily to capital expenditures associated with the expansion of the Company's
facilities and purchases of equipment. As a percentage of sales, depreciation
increased to 4.0% in 1996 from 3.0% in 1995.
Interest Expense. Interest expense increased $254,000, or 604.8%, to
$296,00 in 1996 from $42,000 in 1995. This increase was due to increased levels
outstanding under the Company's line of credit in 1996 compared to 1995.
Net Income. Net income increased $954,000, or 8.3%, to $12.5 million in
1996 from $11.5 million in 1995. As a percentage of net sales, net income
decreased slightly to 14.7% in 1996 from 14.8% in 1995.
Liquidity and Capital Resources
In July 1997, the Company terminated its $10.0 million revolving credit facility
and entered into a loan agreement with First American National Bank ("First
American"). This loan agreement provides for a revolving credit facility of up
to $25 million, which will expire June 30, 2000.
Amounts outstanding under the revolving facility are unsecured and bear interest
at a floating rate equal to, at the Company's option, either LIBOR plus 0.65% or
the Fed Funds effective rate plus 1.5%. The loan agreement contains customary
financial and operating restrictions on the Company, including covenants
restricting the Company, without First American's consent, from incurring
additional indebtedness from, or pledging any of its assets to, other lenders
and from disposing of a substantial portion of its assets. In addition, the
Company is prohibited from declaring any dividend if a default exists under the
revolving credit facility at the time of, or would occur as a result of, such a
declaration. The loan agreement also prohibits sales of property outside of the
ordinary course of business. The loan agreement contains financial covenants
with respect to the Company, including a covenant that the Company's earnings
will not decrease in any year by more than fifty percent of earnings in the
Company's immediately preceding fiscal year. The Company, as of March 25, 1998,
was in compliance with all such covenants.
The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment of
goods, while arrangements with foreign customers (other than foreign customers
that have entered into an inventory management program with the Company)
generally provide that payments are due within either 90 or 120 days following
the date of shipment. Under the Company's inventory management program,
payments typically are due within 30 days after the product is used by the
customer. The Company has developed a presence in foreign markets, and to the
extent foreign sales increase, management believes that the Company's working
capital requirements will increase as a result of longer payment terms provided
to foreign customers. The Company's net sales historically have not been of a
seasonal nature. However, as foreign sales have increased as a percentage of
total sales, seasonality has become a factor for the Company in that many
foreign customers cease production during the month of August.
In the fourth quarter of 1997, upon the commencement of production in its
Kilkenny, Ireland facility, the Company began to bill and receive payment from
some of its foreign customers in their own currency. To date, the Company has
not been materially adversely affected by currency fluctuations or foreign
exchange restrictions. Nonetheless, as a result of these sales, the Company's
foreign exchange risk has increased. Various strategies to manage this risk are
under development and implementation, including a hedging program. In addition,
a strengthening of the US dollar against foreign currencies could impair the
<PAGE>
-16-
ability of the Company to compete with international based competitors for
foreign as well as domestic sales.
Working capital, which consists principally of cash and cash equivalents,
accounts receivable and inventories, was $18.7 million at December 31, 1997, as
compared to $18.4 million at December 31, 1996. The ratio of current assets to
current liabilities increased slightly to 3.5:1 at December 31, 1997 from 3.2:1
at December 31, 1996. Cash flow from operations increased to $14.1 during 1997
from $12.7 million during 1996.
During 1998, the Company plans to spend approximately $9 million on capital
expenditures, including the purchase of additional machinery and equipment for
all four of the Company's facilities. The Company intends to finance these
activities with cash generated from operations and funds available under the
credit facility described above. The Company believes that funds generated from
operations and borrowings from the credit facility will be sufficient to finance
the Company's working capital needs and capital expenditure requirements in
1998.
In December 1996, the Company announced that its Board of Directors authorized
the repurchase of up to 731,462 shares of the Company's Common Stock, equaling
5% of the Company's issued and outstanding shares as of November 11, 1996. The
Company did not purchase any shares under this program during 1996. In February
1997, the Company repurchased 86,000 shares at an aggregate purchase price of
$999,750. In September 1997, the Company repurchased 100,000 shares at an
aggregate purchase price of $1,125,000. The repurchase program is no longer in
effect.
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have not been of a seasonal nature.
However, as foreign sales have increased as a percentage of total sales,
seasonality has become a factor for the Company in that many foreign customers
cease production during the month of August. For information concerning the
Company's quarterly results of operations for the years ended December 31, 1997
and 1996, see Note 15 of the Notes to Financial Statements.
Inflation and Changes in Prices
While the Company's operations have not been affected by inflation
during recent years, prices for 52100 Steel and other raw materials purchased
by the Company are subject to change. For example, during 1995, due to an
increase in worldwide demand for 52100 Steel and the decrease in the value of
the United States dollar relative to foreign currencies, the Company
experienced an increase in the price of 52100 Steel and some difficulty in
obtaining an adequate supply of 52100 Steel from its existing suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources." Typically, the Company's
pricing arrangements with its steel suppliers are subject to adjustment once
every six months. In an effort to limit its exposure to fluctuations in
steel prices, the Company has generally avoided the use of long-term, fixed
price contracts with its customers. Instead, the Company typically reserves
the right to increase product prices periodically in the event of increases
in its raw material costs. The Company was able to minimize the impact on its
operations resulting from the 52100 Steel price increases by taking such
measures. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Liquidity and Capital Resources."
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution that this report and the 1997 Annual Report
to Stockholders contain, and future filings by the Company, press releases and
oral statements made by the Company's authorized representatives may contain,
forward looking statements that involve certain risks and uncertainties. The
Company's actual results could differ materially from those expressed in such
forward looking statements due to important factors bearing on the Company's
business, many of which are discussed elsewhere in this filing and in the
Company's prior filings. The following paragraphs discuss the risk factors that
the Company regards as the most significant, although the
<PAGE>
-17-
Company wishes to caution that other factors that currently are not considered
significant or that currently cannot be foreseen may in the future prove to be
important in affecting the Company's results of operations. The Company
undertakes no obligation to update publicly or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
Industry Risks. The precision ball and roller industry is cyclical and
tends to decline in response to overall declines in industrial production. The
Company's sales could be negatively affected by adverse conditions in the
industrial production sector of the economy or by adverse global or national
economic conditions generally.
Competition. The precision ball and roller market is highly competitive,
and many of the ball and roller manufacturers in the market are larger and have
substantially greater resources than the Company. The Company's competitors are
continuously exploring and implementing improvements in technology and
manufacturing processes in order to improve product quality, and the Company's
ability to remain competitive will depend, among other things, on whether it is
able, in a cost effective manner, to keep apace with such quality improvements.
In addition, the Company competes with many of its customers that, in addition
to producing bearings, also internally produce balls and rollers for sale to
third parties. The Company also faces a risk that its customers will decide to
produce balls and rollers internally rather than outsourcing their needs to the
Company.
Rapid Growth. The Company has undergone rapid growth over the last several
years. Accordingly, the Company risks underutilization or inefficient
utilization of its production facilities in future years. The Company also
faces risks associated with start-up expenses, inefficiencies, delays and
increased depreciation costs associated with its new facilities in Mountain
City, Tennessee, in Kilkenny, Ireland and with its plant expansions. The
Company currently is not operating at full capacity and faces risks of further
under-utilization or inefficient utilization of its production facilities in
future years.
Raw Material Shortages. Because the balls and rollers manufactured by the
Company have highly-specialized applications, their production requires the use
of very particular types of steel. Due to quality constraints in the United
States, the Company obtains the vast majority of its steel from overseas
suppliers. Steel shortages or transportation problems, particularly with
respect to 52100 Steel, could have a detrimental effect on the Company's
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Risks Associated with International Trade. Because the Company obtains a
majority of its raw materials from overseas suppliers and sells to a large
number of international customers, the Company faces risks associated with (i)
adverse foreign currency fluctuations, (ii) changes in trade, monetary and
fiscal policies, laws and regulations, and other activities of governments,
agencies and similar organizations, (iii) the imposition of trade restrictions
or prohibitions, (iv) the imposition of import or other charges or taxes, and
(v) unstable governments or legal systems in countries in which the Company's
suppliers and customers are located. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Inflation and Changes in Prices." In the fourth
quarter of 1997, Company began accepting payment in foreign currency from
foreign customers. In addition, an increase in the value of the United States
dollar relative to foreign currencies may adversely affect the ability of the
Company to compete with its foreign-based competitors for international as well
as domestic sales to the extent payments are made in United States dollars.
Dependence on Major Customers. During 1997, the Company's ten largest
customers accounted for approximately 77% of its net sales. Sales to various
U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 37% of net sales in
1997, and sales to FAG accounted for approximately 10% of net sales in 1997.
The Company currently negotiates and contracts with various purchasing units
within SKF and believes that, in certain respects, such units operate
independently with respect to purchasing decisions. There can be no assurance,
however, that SKF will not centralize purchasing decisions in the
<PAGE>
-18-
future. None of the Company's other customers accounted for more than 10% of
its net sales in 1997, but sales to two of its customers each represented more
than 5% of the Company's 1997 net sales. The loss of all or a substantial
portion of sales to these customers would have a material adverse effect on the
Company's business.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
<PAGE>
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accounts.......................................................... 20
Balance Sheets at December 31, 1997 and 1996............................................ 21
Statements of Income for the three years ended December 31, 1997........................ 22
Statements of Changes in Stockholders' Equity for the three years
ended December 31, 1997............................................................. 23
Statements of Cash Flows for the three years ended December 31, 1997.................... 24
Notes to Financial Statements........................................................... 25
Financial Statement Schedules:
For the three years ended December 31, 1997
II - Valuation and Qualifying Accounts and Reserves............................... 38
</TABLE>
<PAGE>
-20-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NN Ball & Roller, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of NN Ball &
Roller, Inc. and its subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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 of
these statements in accordance with generally accepted auditing standards
which required 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, assessing
the accounting principles used and significant estimates made by management
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
February 9, 1998
<PAGE>
-21-
NN Ball & Roller, Inc.
Balance Sheets (in thousands, except per share date)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- --------
<S> <C> <C>
Assets
Current assets:
Cash........................................... $ 366 $ --
Accounts receivable, net....................... 12,449 15,754
Inventories, net............................... 11,865 10,408
Other current assets........................... 1,505 565
------- -------
Total current assets......................... 26,185 26,727
Property, plant and equipment, net .............. 37,088 32,419
Other ........................................... -- 146
------- -------
Total assets................................. $63,273 $59,292
------- -------
------- -------
Liabilities and stockholders' equity
Current liabilities:
Revolving credit facility...................... $ 1,480 $ 2,308
Accounts payable - trade....................... 3,662 4,054
Accrued vacation expense....................... 519 370
Deferred income................................ 458 --
Income taxes payable........................... -- 96
Accrued sales rebate........................... 176 755
Other liabilities.............................. 1,176 791
------- -------
Total current liabilities.................... 7,471 8,374
Deferred income taxes............................ 2,831 2,208
------- -------
Total liabilities............................ 10,302 10,582
------- -------
Stockholders' equity:
Common stock - $0.01 par value, authorized -
45,000 (1997) and 45,000 (1996) shares, issued
and outstanding - 14,804 (1997) and 14,629
(1996) shares................................. 149 146
Additional paid-in capital..................... 27,902 26,983
Retained earnings.............................. 25,387 21,581
Cumulative translation adjustment.............. (467) --
------- -------
Total stockholders' equity................... 52,971 48,710
------- -------
Total liabilities and stockholders' equity... $63,273 $59,292
------- -------
------- -------
</TABLE>
<PAGE>
-22-
NN Ball & Roller, Inc.
Statements of Income (in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
Net Sales..................................... $ 75,252 $ 84,539 $ 77,786
Cost of products sold......................... 51,707 56,695 53,912
----------- ------------ -----------
Gross profit.................................. 23,545 27,844 23,874
Selling, general and administrative expenses.. 5,518 4,890 4,249
Depreciation.................................. 4,106 3,358 2,364
----------- ------------ -----------
Income from operations........................ 13,921 19,596 17,261
Interest expense.............................. 29 296 42
----------- ------------ -----------
Income before provision for income taxes...... 13,892 19,300 17,219
Provision for income taxes.................... 5,382 6,835 5,708
----------- ------------ -----------
Net income.................................... $ 8,510 $ 12,465 $ 11,511
----------- ------------ -----------
----------- ------------ -----------
Net income per share.......................... $ .57 $ .83 $ .79
----------- ------------ -----------
Shares outstanding............................ 14,804 14,629 14,473
----------- ------------ -----------
----------- ------------ -----------
Net income per share-assuming dilution........ $ .57 $ .83 $ .79
Shares outstanding............................ 14,804 15,042 14,583
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
<PAGE>
-23-
NN Ball & Roller, Inc.
Statements of Changes in Stockholders' Equity (in thousands)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
------------ Additional Cumulative
Number Par paid-in Retained translation
of shares value capital earnings adjustments Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 6,432 $ 64 $ 25,289 $ 5,184 $ -- $30,537
Net income -- -- -- 11,511 -- 11,511
Dividends paid -- -- -- (2,830) -- (2,830)
Three-for-two stock split 3,216 32 -- (32) -- --
Three-for-two stock split 4,825 48 -- (48) -- --
------ ---- -------- ------- --------- -------
Balance, December 31, 1995 14,473 144 25,289 15,785 -- 39,218
Net income -- -- -- 12,465 -- 12,465
Dividends paid -- -- -- (4,669) -- (4,669)
Stock options exercised 156 2 1,694 -- -- 1,696
------ ---- -------- ------- --------- -------
Balance, December 31, 1996 14,629 146 29,983 21,581 -- 48,710
Net income -- -- -- 8,510 -- 8,510
Dividends paid -- -- -- (4,704) -- 8,510
Stock options exercised 361 4 3,042 -- -- 3,046
Stock repurchased (186) (1) (2,123) -- -- (2,124)
Cumulative translation -- -- -- -- (467) (467)
------ ---- -------- ------- --------- -------
Balance, December 31, 1997 14,804 $149 $ 27,902 $25,387 $ (467) $52,971
------ ---- -------- ------- --------- -------
------ ---- -------- ------- --------- -------
</TABLE>
<PAGE>
-24-
NN Ball & Roller, Inc.
Statements of Cash Flows (in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 8,510 $ 12,465 $ 11,511
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 4,106 3,358 2,364
Deferred income taxes.............................. 623 488 166
Changes in operating assets and liabilities:
Accounts receivable............................... 3,305 1,161 (5,898)
Inventories....................................... (1,457) (595) (5,563)
Other current assets.............................. (940) (565) 30
Accounts payable-trade............................ (392) (4,147) 4,748
Accrued vacation expense.......................... 149 -- --
Deferred income................................... 458 -- --
Income taxes payable.............................. (96) (112) (287)
Accrued sales rebate.............................. (579) 512 79
Other liabilities................................. 385 100 328
-------- -------- --------
Net cash provided by operations............... 14,072 12,665 9,478
-------- -------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment........ (8,775) (8,410) (14,509)
Other assets........................................ 146 -- (23)
-------- -------- --------
Net cash used for investing activities........ (8,629) (8,410) (14,532)
-------- -------- --------
Cash flows from financing activities:
Net receipts (payments) under revolving line of
credit............................................. (828) (1,282) 3,590
Cash dividends...................................... (4,704) (4,669) (2,830)
Stock options exercised............................. 3,046 1,696 --
Stock repurchased................................... (2,124) -- --
Cumulative translation adjustment................... (467) -- --
-------- -------- --------
Net cash provided (used) by financing
activities................................... (5,077) (4,255) 760
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.. 366 -- (4,294)
Cash and cash equivalents at beginning of period...... -- -- 4,294
-------- -------- --------
Cash and cash equivalents at end of period............ $ 366 $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
-25-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- ------------------------------------------------------------------------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
NN Ball & Roller, Inc. (the "Company") is a manufacturer of balls and rollers
used primarily in the bearing industry. The Company has manufacturing
facilities in Tennessee and South Carolina. During 1997, the Company opened
NN Ball & Roller, Ltd., an operating facility in Kilkenny, Ireland. The
Company sells to both foreign and domestic customers (See Note 11).
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less as cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Major renewals
and betterments are capitalized. When a major property item is retired, its
cost and related accumulated depreciation or amortization are removed from
the property accounts and any gain or loss is recorded in income or expense.
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the depreciable assets for financial reporting
purposes. Accelerated depreciation methods are used for income tax purposes.
Revenue recognition
The Company generally recognizes a sale when goods are shipped and ownership
is assumed by the customer. The Company has implemented an inventory
management program for certain major customers. Under this program, sales are
recognized when products are used by the customer from consigned stock,
instead of at the time of shipment. Inventory on consignment at December 31,
1997 and 1996 was approximately $2,431,000 and $2,610,000, respectively.
Income Taxes
Income taxes are provided based upon income reported for financial statement
purposes. Deferred income taxes reflect the tax effect of temporary
differences between the financial reporting and income tax bases of the
Company's assets and liabilities (See Note 12).
Historical net income per common share
Earnings per share is computed by dividing net income by the actual number of
common shares outstanding during the year. Additionally, earnings per share
assuming dilution is calculated in the same manner with the addition of
dilutive common share equivalents (See Note 13). The dilutive effect of stock
options is computed using the treasury stock method. The fully dilutive
effect of the Company's stock options results in no impact on earnings per
share for any period presented and thus has been omitted from these financial
statements.
<PAGE>
-26-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------
Stock incentive plan
The Company uses the intrinsic value method to account for employee stock
options. Accordingly, under this method, the Company has not recorded
compensation expense related to the options (Note 9). The exercise price of
each option equals the market price of the Company's stock on the date of
grant.
Principles of consolidation
The Company's financial statements include the accounts of NN Ball & Roller,
Inc. and its subsidiary NN Ball & Roller, Ltd. All intercompany accounts and
investments in subsidiaries are eliminated upon consolidation.
Foreign currency translation
Assets and liabilities of the Company's foreign subsidiary are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the year. Cumulative translation adjustments are
reported as a separate component of stockholder's equity.
Use of estimates in the preparation of financial statements
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.
NOTE 2 - CAPITAL CHANGES
On May 2, 1996, the stockholders approved an increase in the number of
authorized common shares from 20,000,000 to 45,000,000. No change was made to
the number of authorized shares of Preferred Stock.
NOTE 3 - STOCK SPLITS
On February 9, 1995, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock dividend
payable on March 5, 1995 to stockholders of record on February 27, 1995. This
resulted in the issuance of approximately 3,216,000 additional shares of
common stock.
On November 13, 1995, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock dividend
payable on December 5, 1995 to stockholders of record on November 27, 1995.
This resulted in the issuance of approximately 4,825,000 additional shares of
common stock. Unless otherwise stated, all references in the financial
statements to stock option data, per share and weighted average share amounts
have been restated to reflect these stock splits.
<PAGE>
-27-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------
NOTE 4 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- --------
(in thousands)
<S> <C> <C>
Trade............................................... $ 12,524 $ 15,516
Employees........................................... 11 84
Other............................................... 229 394
--------- --------
12,764 15,994
Less - Allowance for doubtful accounts.............. 315 240
--------- --------
$ 12,449 $ 15,754
--------- --------
--------- --------
NOTE 5 - INVENTORIES
<CAPTION>
December 31,
----------------------
1997 1996
--------- --------
(in thousands)
<S> <C> <C>
Raw materials......................................... $ 2,911 $ 1,452
Work in process...................................... 2,793 2,586
Finished goods....................................... 6,221 6,430
--------- --------
11,925 10,468
Less - Reserve for excess and obsolete inventory..... 60 60
--------- --------
$ 11,865 $ 10,408
--------- --------
--------- --------
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
---------------------
Estimated
useful life 1997 1996
---------------- --------- --------
<S> <C> <C> <C>
Land................................ $ 323 $ 282
Buildings and improvements.......... 10-25 years 9,718 6,742
Machinery and equipment............. 3-10 years 46,346 44,174
Construction in progress............ 3,286 1,598
--------- -------
59,673 52,796
Less - Accumulated depreciation..... 22,585 20,377
--------- -------
$37,088 $32,419
--------- -------
--------- -------
</TABLE>
<PAGE>
-28-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
________________________________________________________________________________
NOTE 7-SHORT-TERM CREDIT FACILITIES
Effective July 1997, the Company terminated a revolving line of credit with
NationsBank of Tennessee, N.A., which consisted of a $10,000,000 line of
credit of which $2,308,000 was outstanding at December 31, 1996, at an
interest rate of 7.25%, and entered a similar agreement with First American
National Bank. Under the new agreement, the Company may borrow up to
$25,000,000 through June 30,2000. Amounts outstanding under the agreement
are unsecured and are subject to interest charges of the LIBOR rate plus .65%
or the Federal Funds effective rate plus 1.5%, according to the Company's
option. There was $1,480,000 outstanding at December 31, 1997 at an interest
rate of 6.615%. The agreement contains restrictive covenants which specify,
among other things, restrictions on the incurrence of indebtedness and the
maintenance of certain working capital requirements. The Company was in
compliance with such covenants at December 31, 1997.
Interest paid during 1997, 1996 and 1995 was $28,000, $321,000 and $15,000,
respectively.
NOTE 8-EMPLOYEE BENEFIT PLANS
The Company has defined contribution 401(k) profit sharing plan (the "Plan")
covering substantially all employees who have one year of service, have
attained age twenty-one and have elected to participate in the Plan. A
participant may elect to contribute from 1% to 20% of his or her compensation
to the Plan, subject to a maximum deferral set forth in the Internal Revenue
Code. The Company provides a dollar for dollar matching contribution up to
$500 per participant. The employer matching contribution if fully vested at
all times. The contributions by the Company were $154,000, $140,000 and
$148,000 in 1997, 1996 and 1995, respectively.
NOTE 9-STOCK INCENTIVE PLAN
Effective March 2, 1994, the Company adopted the NN Ball & Roller, Inc. Stock
Incentive Plan under which 1,125,000 shares of the Common Stock were reserved
for issuance to officers and key employees of the Company. Awards or grants
under the plan may be made in the form of incentive and nonqualified stock
options, stock appreciation rights and restricted stock. The stock options
and stock appreciation rights must be issued with an exercise price not less
than the fair market value of the Common Stock on the date of grant. The
awards or grants under the plan may have various vesting and expiration
periods as determined at the discretion of the Committee administering the
plan.
<PAGE>
-29-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- ------------------------------------------------------------------------------
The following table summarizes the changes in the number of shares under
option pursuant to the plan described above: (See Note 3)
<TABLE>
<CAPTION>
Number Per share
of shares option price
----------- ------------
<S> <C> <C>
Outstanding at December 31, 1997.......... 508,635 9.39-11.92
Granted................................. 518,250
Exercised............................... --
-----------
Outstanding at December 31, 1995.......... 1,026,885
-----------
-----------
Granted................................. 39,000 15.50
Exercised............................... (156,611)
Forfeited............................... (55,645)
-----------
Outstanding at December 31, 1996.......... 853,629
-----------
-----------
Granted................................. 42,750 10.44-12.50
Exercised............................... (361,002)
Forfeited............................... (74,002)
-----------
Outstanding at December 31, 1997.......... 461,375
-----------
-----------
Exercisable at December 31, 1997.......... 81,750
-----------
-----------
Shares reserved for future grant:
December 31, 1997....................... 146,012
-----------
-----------
</TABLE>
On May 6, 1996 and July 31, 1997, one of the Company's officers exercised
approximately 150,000 and 358,000 stock options, respectively. The exercise
price and the market price of the options at the date of exercise were $6.22
and $25.50 for 1996 and $6.22 and $12.50 for 1997, respectively. Certain of
these options were considered non qualified options and, accordingly, the
Company recorded compensation expense, for income tax purposes only, of
approximately $1,967,000 in 1996 and $2,150,000 in 1997. The reduction in
taxes payable of approximately $686,000 in 1996 and $789,000 in 1997 was
recorded as additional paid-in capital in the accompanying financial
statements.
All options granted in the period January 1, 1995 through December 31,
1997 vest 20% annually, beginning one year from date of grant. The exercise
price of each option equals the market price of the Company's stock on the
date of grant, and an option's maximum term is 10 years. During 1996, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
encourages but does not require a fair value based method of accounting for
stock compensation plans. The Company has elected to continue accounting for
its stock compensation plan using the intrinsic value based method and,
accordingly, has not recorded compensation expense for each of the three
years ended December 31, 1997. Had compensation cost for the Company's stock
compensation plan been determined based on the fair value
<PAGE>
-30-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------
at the option grant dates, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C> <C>
Net income................................. As reported (000's) $ 8,510 $12,465
Pro forma (000's) 8,254 12,146
Earnings per share......................... As reported $ .57 $ .85
Pro forma .56 .81
Earnings per share-assuming dilution....... As reported $ .57 $ .83
Pro forma .56 .81
</TABLE>
The fair value of each option grant was estimated on actual information
available through December 31, 1997 and 1996 using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Term................................................. One year after each 20% vesting date
Risk free interest rate.............................. 5.8% and 6.16% for 1997 and 1996,
respectively
Dividend yield....................................... 3.6% and 1.5% annually for 1997 and 1996,
respectively
Volatility........................................... 30% and 31% for 1997 and 1996,
respectively
Expected forfeitures................................. 0-35%
</TABLE>
NOTE 10 - SEGMENT INFORMATION
During 1997, the Company opened a new operating facility in Kilkenny, Ireland
as discussed in Note 1. The Company's operating results at December 31, 1997
include the following segment information. Identifiable assets are those used
exclusively in the operations of each segment, and consist primarily of cash,
accounts receivable, inventory and property, plant and equipment.
<PAGE>
-31-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS
AT DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales:
United States.......................... $75,103 $84,539 $77,786
Europe................................. 149 -- --
------- ------- -------
Total net sales...................... 75,252 84,539 77,786
Operating income (loss):
United States.......................... 15,219 19,596 17,261
Europe................................. (1,298) -- --
------- ------- -------
Total operating income:.............. 13,921 19,596 17,261
Identifiable assets:
United States.......................... 56,307 59,292 54,241
Europe................................. 6,966 -- --
------- ------- -------
Total identifiable assets............ $63,273 $59,292 $54,241
------- ------- -------
------- ------- -------
</TABLE>
NOTE 11 - SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to customers were concentrated in the following areas:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic:
Bearing manufacturers.................. 40% 34% 34%
Other.................................. 13% 16% 16%
---- ---- ----
53% 50% 50%
Foreign:
Bearing manufacturers.................. 44% 45% 46%
Other.................................. 3% 5% 4%
---- ---- ----
47% 50% 50%
---- ---- ----
100% 100% 100%
---- ---- ----
---- ---- ----
</TABLE>
<PAGE>
-32-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------
Foreign sales were concentrated in the following geographical regions:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Europe ............................................. 24% 27% 30%
Canada ............................................. 5% 5% 4%
South America....................................... 7% 6% 3%
Other export........................................ 11% 12% 13%
------ ------ ------
Total foreign....................................... 47% 50% 50%
------ ------ ------
------ ------ ------
</TABLE>
Two customers accounted for 47% of consolidated sales in 1997. The only
customers accounting for 10% or more of net sales in any prior year were SKF
Bearings Industries, which represented 37% for years 1996 and 1995, and FAG
Bearings Corporation, which represented 10% in 1996.
NOTE 12 - INCOME TAXES
The Company uses the asset and liability method to account for deferred
income taxes. Under the asset and liability method, deferred income taxes
are provided for the temporary differences between the financial reporting
and income tax bases of the Company's assets and liabilities using enacted
income tax rates expected to be in effect when the temporary differences
reverse.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> (in thousands)
Current <C> <C> <C>
Federal........................................ $ 4,338 $ 5,696 $ 4,978
State.......................................... 421 651 564
------- ------- -------
4,759 6,347 5,542
------- ------- -------
Deferred
Federal........................................ 554 436 149
State.......................................... 69 52 17
------- ------- -------
623 488 166
------- ------- -------
$ 5,382 6,835 5,708
------- ------- -------
</TABLE>
<PAGE>
-33-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -----------------------------------------------------------------------------
A reconciliation of taxes based on the federal statutory rate of 35% for the
years ended December 31, 1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1996 1995
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Income taxes at the federal statutory rate................... $ 4,862 $ 6,755 $ 6,027
State income taxes, net of federal benefit................... 318 457 378
Foreign sales corporation benefit............................ (249) (458) (425)
Impact of foreign taxes...................................... 283 - -
Other, net................................................... 168 81 (272)
------- ------- --------
Provision for income taxes $ 5,382 $ 6,835 $ 5,708
------- ------- --------
------- ------- --------
</TABLE>
The tax effects of the temporary differences are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------ ------
(in thousands)
<S> <C> <C>
Deferred income tax liability
Tax in excess of book depreciation............................... $ 3,553 $ 2,754
Duty drawback receivable......................................... 55 -
------- -------
Gross deferred income tax liability.............................. 3,608 2,754
------- -------
Deferred income tax assets
Inventories...................................................... 281 211
Vacation reserve................................................. 191 135
Health insurance reserve......................................... 131 64
Other working capital accruals................................... 174 136
-------- ------
Gross deferred income tax assets................................. 777 546
-------- -------
Net deferred income tax liability................................... $ 2,831 $ 2,208
-------- -------
-------- -------
</TABLE>
Income tax payments were approximately $4,825,749, $5,767,000 and $5,782,000
in 1997, 1996 and 1995, respectively.
<PAGE>
-34-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
NOTE 13 - RECONCILIATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------
Net
income
Income Shares per share
--------- -------- ---------
<S> <C> <C> <C>
Net income................................ $ 8,510
Basic net income per share................ 8,510 14,804 $ .57
Effect of dilutive stock options.......... --
--------- -------- ---------
Diluted net income per share.............. $ 8,510 14,804 $ .57
--------- -------- ---------
--------- -------- ---------
<CAPTION>
Year ended December 31, 1996
-------------------------------
Net
income
Income Shares per share
--------- -------- ---------
<S> <C> <C> <C>
Net income................................ $ 12,465
Basic net income per share................ 12,465 14,629 $ .85
Effect of dilutive stock options.......... -- 413
--------- -------- ---------
Diluted net income per share.............. $ 12,465 15,042 $ .83
--------- -------- ---------
--------- -------- ---------
<CAPTION>
Year ended December 31, 1995
-------------------------------
Net
income
Income Shares per share
--------- -------- ---------
<S> <C> <C> <C>
Net income................................ $ 11,511
Basic net income per share................ 11,511 14,473 $ .79
Effect of dilutive stock options.......... -- 110 --
--------- -------- ---------
Diluted net income per share.............. $ 11,511 14,583 $ .79
--------- -------- ---------
--------- -------- ---------
</TABLE>
<PAGE>
-35-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS
The Company has operating lease commitments for machinery and office
equipment which expire on varying dates. Rent expense for 1997, 1996, and
1995 was $352,000, $378,000 and $242,000, respectively. The following is a
schedule by year of future minimum lease payments as of December 31, 1997
under operating leases that have initial or remaining noncancelable lease
terms in excess of one year (in thousands).
<TABLE>
<CAPTION>
Year ended
December 31,
<S> <C>
1998 ..................................................... $ 51
1999 ..................................................... 51
2000 ..................................................... 30
2001 ..................................................... -
2002 ..................................................... -
--------
Total minimum lease payments $ 132
--------
</TABLE>
<PAGE>
-36-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1196, and 1995
- ---------------------------------------------------------------------------
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 1997 and 1996 (in thousands, except per share
data).
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<C> <C> <C> <C> <C>
Net sales ............................................... $20,319 $20,964 $17,231 $16,689
Gross profit ............................................ 6,481 6,657 4,845 6,639
Net income .............................................. 2,639 2,732 1,299 1,814
Basic net income per share .............................. .18 .19 .09 .12
Dilutive net income per share ........................... .18 .19 .09 .12
Shares outstanding (Notes 2 and 3):
Basic number of shares ................................ 14,543 14,543 14,804 14,804
Effect of dilutive stock options ...................... 170 170 -- --
-------- -------- -------- --------
Diluted number of shares .............................. 14,713 14,713 14,804 14,804
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
Year ended December 31, 1996
-----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<C> <C> <C> <C> <C>
Net sales ............................................... $26,085 $22,834 $16,558 $19,062
Gross profit ............................................ 8,517 7,471 5,730 6,126
Net income .............................................. 4,272 3,480 2,195 2,518
Basic net income per share .............................. .29 .24 .15 .17
Dilutive net income per share ........................... .28 .23 .15 .17
Shares outstanding (Notes 2 and 3):
Basic number of shares ................................ 14,478 14,631 14,629 14,629
Effect of dilutive stock options ...................... 593 500 332 274
-------- -------- -------- --------
Diluted number of shares .............................. 15,071 15,131 14,961 14,903
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<PAGE>
-37-
NN Ball & Roller, Inc.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
- ------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" (SFAS 107), SFAS 107 requires the disclosure of the fair value
of financial instruments.
The financial position of the Company at December 31, 1997 includes certain
financial instruments. Management believes the fair value of these
instruments approximates their carrying value. The carrying amounts and
estimated fair value of the Company's financial instruments at December 31,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....... $ 366 $ 366 $ -- $ --
Trade accounts receivable....... 12,524 12,524 15,516 15,516
Less: allowance for doubtful
accounts..................... (315) -- (240) --
Liabilities:
Revolving credit facility....... 1,480 1,480 2,308 2,308
</TABLE>
<PAGE>
-38-
NN Ball & Roller, Inc.
Valuation and Qualifying Accounts and Reserves Schedule II
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Balance
beginning at end
Description of year Additions Deductions(1) of year
- ----------------------------------------------- --------- --------- ------------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts................ $ 75 $ 40 $ -- $ 115
Reserve for excess and obsolete inventory...... $ 60 $ -- $ -- $ 60
Year ended December 31, 1996
Allowance for doubtful accounts................ $ 115 $ 125 $ -- $ 240
Reserve for excess and obsolete inventory...... $ 60 $ -- $ -- $ 60
Year ended December 31, 1997
Allowance for doubtful accounts................ $ 240 $ 75 $ -- $ 315
Reserve for excess and obsolete inventory...... $ 60 $ -- $ -- $ 60
</TABLE>
- ------------------------------------------------
(1) Deductions represent amounts written off.
<PAGE>
-39-
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10 Directors and Executive Officers of the Registrant
Directors. The information required by Item 401 of Regulation S-K
concerning the Company's directors is contained in the section entitled
"Election of Directors -- Information about the Directors" of the Company's
definitive Proxy Statement (to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997) and, in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Executive Officers. Information required by Item 401 of Regulation S-K
concerning the Company's executive officers is set forth in Item 1 hereof under
the caption "Executive Officers of the Registrant."
Compliance with Section 16(a) of the Securities Exchange Act. The
information required by Item 405 of Regulation S-K concerning compliance with
Section 16(a) of the Securities Exchange Act by the Company's directors and
executive officers and any 10% beneficial owners is contained in the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's definitive Proxy Statement and, in accordance with General Instruction
G to Form 10-K, is hereby incorporated herein by reference.
Item 11 Executive Compensation
The information required by Item 402 of Regulation S-K is contained in the
sections entitled "Election of Directors -- Compensation of Directors" and
"Executive Compensation" of the Company's definitive Proxy Statement and, in
accordance with General Instruction G to Form 10-K, is hereby incorporated
herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K is contained in the
section entitled "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement and, in accordance with General Instruction G to Form
10-K, is hereby incorporated herein by reference.
<PAGE>
-40-
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements of the Company filed as part of this Annual
Report on Form 10-K begin on the following pages hereof:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 20
Balance Sheets at December 31, 1997 and 1996. . . . . . . . . . . . . 21
Statements of Income for the Three Years Ended December 31, 1997. . . 22
Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1997 . . . . . . . . . . . . . . . . 23
Statements of Cash Flows for the Three Years Ended December 31, 1997. 24
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 25
(a) 2. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and Reserves . . . . 38
</TABLE>
(a) 3. Exhibits Required by Item 601 of Regulation S-K
3.1 Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 -- File No. 33-74694).
3.2 Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 --
File No. 33-74694).
4.1 Form of Common Stock certificate (incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-1 -- File No.
33-74694).
10.1* NN Ball & Roller, Inc. Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement
on Form S-1 -- File No. 33-74694).
10.2* Stock Option Agreement between the Company and James J. Mitchell
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 -- File No. 33-74694).
10.3* $1.2 million Life Insurance Policy purchased by Mr. Ennen, the
premiums of which are paid for by the Company (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 -- File No. 33-74694).
10.4* $300,000 Life Insurance Policy purchased by the Company in favor
of Mr. Bowman (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 -- File No.
33-74694).
<PAGE>
-41-
10.5 Form of Confidentiality and Non-Compete Agreements for Executive
Officers of the Company (incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1 -- File
No. 33-74694).
10.6 Stockholder Agreement, dated February 22, 1994, among certain
stockholders of the Company (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 -- File
No. 33-74694).
10.7 Form of Indemnification Agreement for officers and directors of
the Company (incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 -- File No.
33-74694).
10.8 Lease, dated as of September 5, 1995, between the Company and the
State of Tennessee Department of Economic and Community
Development and the County of Johnson County, Tennessee
(incorporated by reference to Exhibit 10.9 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
10.9 Lease, dated as of March 22, 1996, between the Company and the
State of Tennessee Department of Economic and Community
Development and the County of Johnson County, Tennessee
(incorporated by reference to Exhibit 10.10 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
10.10* Stock Option Agreement, dated as of July 3, 1995, between the
Company and Roderick R. Baty (incorporated by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.11 Quitclaim Deed, dated January 20, 1997, executed by Johnson
County, Tennessee in favor of the Company (incorporated by
reference to Exhibit 10.12 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.12 Loan Agreement, dated as of July 25, 1997, between the Company
and First American National Bank (incorporated by reference to
Exhibit 10.13 of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997).
10.13* Employment Agreement, dated August 1, 1997, between the Company
and Roderick R. Baty (incorporated by reference to Exhibit 10.14
of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997).
10.14* Severance Agreement, dated August 28, 1997, between the Company
and James J. Mitchell (incorporated by reference to Exhibit 10.15
of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997).
23.1 Consent of Price Waterhouse LLP (filed herewith).
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1997.
<PAGE>
-42-
(c) Exhibits
See Index to Exhibits (attached hereto).
The Company will provide without charge to any person, upon the written
request of such person, a copy of any of the Exhibits to this Form 10-K.
<PAGE>
-43-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /s/ Richard D. Ennen
--------------------------------
Richard D. Ennen
Chairman and Director
Dated: March , 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ----------------------------------------------- ----------------------------------------------- ---------------
<S> <C> <C>
/s/ Richard D. Ennen Chairman and Director March , 1998
- -----------------------------------
Richard D. Ennen
/s/ Roderick R. Baty President, Chief Executive Officer and Director
- -----------------------------------
Roderick R. Baty (Principal Executive Officer) March , 1998
/s/ William C. Kelly, Jr. Treasurer, Assistant Secretary and Chief
- ----------------------------------- Accounting Officer (Principal Financial and
William C. Kelly, Jr. Accounting Officer) March , 1998
/s/ Deborah Ennen Bagierek Director
- -----------------------------------
Deborah Ennen Bagierek March , 1998
/s/ Michael D. Huff Director March , 1998
- -----------------------------------
Michael D. Huff
/s/ G. Ronald Morris Director March , 1998
- -----------------------------------
G. Ronald Morris
/s/ Michael E. Werner Director March , 1998
- -----------------------------------
Michael E. Werner
/s/ Steven T. Warshaw Director March , 1998
- -----------------------------------
Steven T. Warshaw
</TABLE>
INDEX TO EXHIBITS
<PAGE>
-44-
Exhibit Sequential
<TABLE>
<CAPTION>
Number Name of Exhibit
- ------ ---------------
<S> <C>
23.1 Consent of Price Waterhouse LLP
</TABLE>
Note: The Company will provide without charge to any person,
upon the written request of such person, a copy of any
of the Exhibits to this Form 10-K.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-74694) of NN Ball and Roller, Inc. of our report
dated February 9, 1998, appearing on page 20 in the 1997 Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 366 0
<SECURITIES> 0 0
<RECEIVABLES> 12,764 15,994
<ALLOWANCES> (315) (240)
<INVENTORY> 11,865 10,408
<CURRENT-ASSETS> 26,185 26,727
<PP&E> 59,673 52,796
<DEPRECIATION> (22,585) (20,377)
<TOTAL-ASSETS> 63,273 59,292
<CURRENT-LIABILITIES> 7,471 8,374
<BONDS> 0 0
0 0
0 0
<COMMON> 149 146
<OTHER-SE> 52,822 48,564
<TOTAL-LIABILITY-AND-EQUITY> 63,273 59,292
<SALES> 75,252 84,539
<TOTAL-REVENUES> 75,252 84,539
<CGS> 51,707 56,695
<TOTAL-COSTS> 51,707 56,695
<OTHER-EXPENSES> 9,624 8,248
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29 296
<INCOME-PRETAX> 13,892 19,300
<INCOME-TAX> 5,382 6,835
<INCOME-CONTINUING> 8,510 12,465
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,510 12,465
<EPS-PRIMARY> 0.57 0.85
<EPS-DILUTED> 0.57 0.83
</TABLE>
