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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-23486
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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 37650
Erwin, Tennessee (Zip Code)
(Address of principal executive offices)
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. [ ]
The number of shares of the registrant's common stock outstanding on March
20, 1997 was 14,543,242.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 20, 1997, based on the closing price on the NASDAQ National
Market System on that date was approximately $112,888,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 1997 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Form 10-K.
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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 and Chief
Executive Officer. 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 1996, the Company sold its products to over 400 customers
located in 28 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 and Walterboro, South Carolina, and at
its new facility in Mountain City, Tennessee, 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 89%, 93% and 93% of the Company's net sales in 1994, 1995 and
1996, 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 1996, the percentage of high precision balls produced by the
Company for use in quiet bearing applications has increased from approximately
54% to approximately 78% 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 1996, approximately 94% 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,
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 1992 through 1996:
NET SALES
----------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
(IN THOUSANDS)
Domestic:
Bearing Manufacturers $28,894 $26,764 $24,195 $19,076 $17,848
34% 34% 40% 44% 41%
Other 13,549 12,533 13,912 10,861 11,890
16% 16% 23% 25% 27%
Foreign:
Bearing Manufacturers 38,264 35,279 20,566 12,933 13,117
45% 46% 34% 30% 30%
Other 3,832 3,210 1,814 655 1,162
5% 4% 3% 1% 2%
------ ------ ------- ------- -------
Total $84,539 $77,786 $60,487 $43,525 $44,017
------ ------ ------- ------- -------
------ ------ ------- ------- -------
100% 100% 100% 100% 100%
------ ------ ------- ------- -------
------ ------ ------- ------- -------
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
emphasizes the potential quality advantages and cost savings associated with
the outsourcing of such bearing
2
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 1994, 1995 and 1996 by geographic region, see Note
10 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
79% in 1996. 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 1996, the Company sold its products to more than 400 domestic
customers and to more than 70 foreign customers located in 28 different
countries. Approximately 50% of the Company's net sales in 1996 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 1996, the Company's ten largest customers accounted for
approximately 78% 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 1996 and sales to FAG
accounted for approximately 10% of net sales in 1996. None of the Company's
other customers accounted for more than 10% of its net sales in 1996;
however, sales to the Torrington Company, American NTN Bearing Manufacturing
Corporation 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 within 60 days, and frequently
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. Management believes that 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 also 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.
3
EMPLOYEES
As of December 31, 1996, the Company had 393 full-time employees of whom
362 were engaged in production/maintenance. None of the employees 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 1996,
approximately 94% 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.
4
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.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company consist of the following persons:
NAME AGE POSITION
- ----------------- ------ ----------------------------------
Richard D. Ennen 69 Chairman of the Board,
Chief Executive Officer and
Director
James J. Mitchell 57 President, Chief Operating
Officer and Director
Roderick R. Baty 43 Vice President, Chief Financial
Officer and Director
William C. Kelly, Jr. 38 Treasurer, Assistant
Secretary and Chief
Accounting Officer
Frank T. Gentry, III 41 Vice President--Human
Resources/Materials
Charles L. Edmisten 50 Vice President--Operations
Corby W. Self 40 Vice President--Manufacturing
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, Chief Executive Officer and a director of the Company
since its formation in 1980. He served 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.
James J. Mitchell became President and Chief Operating Officer of the
Company in 1990 and a director of the Company in 1994. From 1975 until 1990,
Mr. Mitchell held various positions with the Link Belt Bearing Division of
Rexnord Corporation, a bearing manufacturer, including Vice President/General
Manager from 1983 until 1990. Mr. Mitchell has over 30 years of experience in
the anti-friction bearing industry and has held positions with executive
responsibilities for over 10 years.
Roderick R. Baty joined the Company in July 1995 as Vice President and Chief
Financial Officer and was elected to the Board of Directors to fill a vacant
seat in August 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
6
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--Human
Resources/Materials of the Company in October 1996. Mr. Gentry's
responsibilities include purchasing, inventory control, transportation and
personnel. 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.
Charles L. Edmisten has served as the Company's Vice President--Operations
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.
Corby W. Self was appointed Vice President--Manufacturing of the Company in
October 1996. Mr. Self's responsibilities include oversight of the manufacturing
process at all of the Company's facilities. Mr. Self joined the Company in 1989
and held various production control positions within the Company from 1989
through July 1995. From July 1995 through April 1996, Mr. Self was the plant
manager of the Company's Mountain City facility, and from April 1996 through
October 1996, he was the plant manager of the Company's Walterboro facility.
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 three manufacturing facilities located, respectively, in
Erwin, Tennessee, Walterboro, South Carolina and Mountain City, Tennessee. 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 Erwin, Walterboro and Mountain City plants currently have approximately
125,000, 100,000 and 48,000 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 and
the Mountain City plant is located and on an 8 acre tract of land owned by the
Company. During 1996, the Company added new machinery and equipment at all of
its 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 and Mountain City 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,
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 of the Notes to Financial
Statements.
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.
7
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 1996.
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
20, 1997, there were 244 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 1995 and 1996. The high and low sale
prices and the dividends paid per share have been adjusted (and, in the case of
the sale prices, rounded to the nearest eighth) to reflect the two three-for-two
splits of the Common Stock effective on March 5, 1995 and December 5, 1995,
respectively. See Note 3 of the Notes to Financial Statements.
PRICE DIVIDEND
------------------- ----------
HIGH LOW
-------- ---------
1995
First Quarter.............. 10 3/8 8 1/4 .035
Second Quarter............. 12 5/8 9 5/8 .053
Third Quarter.............. 13 7/8 11 1/8 .107
Fourth Quarter............. 19 1/2 10 1/2 --
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
The declaration and payment of dividends are subject to the sole
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" herein.
8
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 herein. The data set forth below as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996 (except for the pro forma statement of income data),
have been derived from the Financial Statements of the Company which have
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon is included as part of Item 8. The financial data as of December 31,
1994, 1993 and 1992, and for the years ended December 31, 1993 and 1992 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."
9
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Net sales.................................... $ 84,539 $ 77,786 $ 60,487 $ 43,525 $ 44,017
Cost of products sold........................ 56,695 53,912 40,110 29,762 30,623
--------- --------- --------- --------- ---------
Gross profit............................... 27,844 23,874 20,377 13,763 13,394
Selling, general and administrative
expenses................................... 4,890 4,249 3,439 2,621 2,434
Depreciation................................. 3,358 2,364 1,996 1,868 1,698
--------- --------- --------- --------- ---------
Income from operations....................... 19,596 17,261 14,942 9,274 9,262
Interest expense............................. 296 42 354 1,382 1,674
--------- --------- --------- --------- ---------
Income before provision for income taxes and
extraordinary item......................... 19,300 17,219 14,588 7,892 7,588
Provision for income taxes (1)............... 6,835 5,708 5,704 236 233
--------- --------- --------- --------- ---------
Income before extraordinary item............. 12,465 11,511 8,884 7,656 7,355
Extraordinary loss from early extinguishment
of debt (net of income tax benefit of $710)
(2)........................................ -- -- (1,160) -- --
--------- --------- --------- --------- ---------
Net income................................... $ 12,465 $ 11,511 $ 7,724 $ 7,656 $ 7,355
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share:
Income before extraordinary item........... $ .83 $ .79 $ .65
Extraordinary item, net (2)................ -- -- (.09)
--------- --------- ---------
Net income per share (3)..................... $ .83 $ .79 $ .56
--------- --------- ---------
--------- --------- ---------
Dividends declared........................... $ .32 $ .20 $ .07
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares outstanding
(3)........................................ 15,042 14,583 13,716
--------- --------- ---------
--------- --------- ---------
10
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Pro Forma Statement of Income Data (4):
Income before provision for income taxes
and extraordinary item................................... $ 14,588 $ 7,892 $ 7,588
Provision for income taxes................................. 5,543 2,999 2,884
--------- --------- ---------
Income before extraordinary item........................... 9,045 4,893 4,704
--------- --------- ---------
Extraordinary item, net (2)................................ (1,160) -- --
--------- --------- ---------
Net income................................................. $ 7,885 $ 4,893 $ 4,704
--------- --------- ---------
--------- --------- ---------
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............................................. $ 26,727 $ 26,728 $ 21,591 $ 13,971 $ 12,433
Current liabilities........................................ 8,374 13,303 4,845 7,859 6,319
Total assets............................................... 59,292 54,241 36,936 26,215 24,730
Long-term debt (less current portion)...................... -- -- -- 10,000 12,075
Stockholders' equity....................................... 48,710 39,218 30,537 8,184 6,168
- ------------------------
(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 11 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
11
$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. See Note 2 of the Notes to Financial Statements.
(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 Notes 2 and 3 of
the Notes to Financial Statements.
(4) The pro forma statement of income data for 1994 and prior years 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 Notes 1, 2 and 11 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 1996, balls accounted for approximately
93% of the Company's net sales, while rollers accounted for the remaining 7%.
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 in recent years and represented approximately 50% of net sales in
1996. See Note 10 of the Notes to Financial Statements.
Significant factors in the Company's growth 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 1996, the
percentage of high precision balls produced by the Company for use in quiet
bearing applications has increased from approximately 54% to approximately 78%
of total net ball sales. Management believes that the Company's sales growth has
resulted from 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.
12
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.
AS A PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Net sales................................................................................ 100.0% 100.0% 100.0%
Cost of products sold.................................................................... 67.1 69.3 66.3
--------- --------- ---------
Gross profit............................................................................. 32.9 30.7 33.7
Selling, general and administrative expenses............................................. 5.8 5.5 5.7
Depreciation............................................................................. 4.0 3.0 3.3
--------- --------- ---------
Income from operations................................................................... 23.1 22.2 24.7
Interest expense......................................................................... .3 .1 .6
--------- --------- ---------
Income before provision for income taxes and extraordinary item.......................... 22.8 22.1 24.1
Provision for income taxes............................................................... 8.1 7.3 9.4
--------- --------- ---------
Income before extraordinary item......................................................... 14.7 14.8 14.7
Extraordinary loss (net of income tax benefit)........................................... -- -- (1.9)
--------- --------- ---------
Net income............................................................................... 14.7% 14.8% 12.8%
--------- --------- ---------
--------- --------- ---------
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
NET SALES. The Company's net sales increased $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. For information
concerning the Company's quarterly results of operations for the year ended
December 31, 1996, See Note 13 of the Notes to Financial Statements.
13
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." 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.
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. This 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 net sales,
depreciation increased to 4.0% in 1996 from 3.0% in 1995.
INTEREST EXPENSE. Interest expense increased $254,000, or 604.8%, to
$296,000 in 1996 from $42,000 in 1995. This increase was due to increased levels
outstanding under the Company's line of credit in 1996 as compared to 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
NET SALES. The Company's net sales increased by nearly $17.3 million, or
28.6%, to $77.8 million in 1995 from $60.5 million in 1994. Foreign net sales
increased $16.1 million, or 71.9%, to $38.5 million in 1995 from $22.4 million
in 1994. 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 $1.2 million, or 3.1%, to $39.3 million
in 1995 from $38.1 million in 1994. This increase was due primarily to increased
sales volumes with existing customers.
GROSS PROFIT. Gross profit increased by $3.5 million, or 17.2%, to $23.9
million in 1995 from $20.4 million in 1994. As a percentage of net sales, gross
profit decreased to 30.7% in 1995 from 33.7% in 1994. This decrease in gross
profit as a percentage of net sales was due primarily to a 52100 Steel supply
shortage which existed during 1995. As a result of such shortage and production
delays resulting therefrom, the Company incurred increased raw material costs
and increased transportation costs for finished products in order to meet
customer delivery requirements in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $810,000, or 23.6%, to $4.2 million in 1995
from $3.4 million in 1994. This increase was due primarily to costs associated
with increased foreign travel in the sales department and costs associated with
the Company's status as
14
a public company. As a percentage of net sales, selling, general and
administrative expenses decreased slightly to 5.5% in 1995 from 5.7% in 1994.
DEPRECIATION EXPENSE. Depreciation expense increased slightly to $2.4
million in 1995 from $2.0 million in 1994. The increase of $368,000, or 18.4%,
was due primarily to capital expenditures associated with the expansion of the
Company's facilities and purchases of equipment. Depreciation expense as a
percentage of net sales decreased to 3.0% in 1995 from 3.3% in 1994.
INTEREST EXPENSE. Interest expense decreased by more than $312,000, or
88.1%, to $42,000 in 1995 from $354,000 in 1994. This decrease was due primarily
to the retirement of $12 million of 10.88% Senior Secured Notes (the "Senior
Notes") during the first quarter of 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
EXTRAORDINARY ITEM. In the first quarter of 1994, the Company recorded an
extraordinary charge of $1.9 million ($1.2 million net of tax benefit of
$710,000) related to the early retirement of the Senior Notes. The charge
consisted of $1.7 million in prepayment penalties and a non-cash charge of
$142,000 related to the write-off of deferred loan costs associated with the
borrowings.
NET INCOME. Net income increased by $3.8 million, or 49.0%, to $11.5
million in 1995 from $7.7 million in 1994. As a percentage of net sales, net
income increased to 14.8% in 1995 from 12.8% in 1994. This increase in net
income as a percentage of net sales was due primarily to the combined effect of
(i) a non-recurring, non-cash charge of $1.2 million to earnings in 1994 to
record deferred income taxes upon termination of the Company's S corporation
status in March 1994 and (ii) an extraordinary charge of $1.9 million ($1.2
million net of tax benefit of $710,000) in the first quarter of 1994 for the
early retirement of the Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
In March 1994, the Company completed an initial public offering of Common
Stock pursuant to which 2,000,000 shares were issued and sold by the Company
(without adjustment for the two three-for-two stock splits effective on March 5,
1995 and December 5, 1995, respectively). Net proceeds to the Company were $24.9
million (net of $2.0 million underwriters' discount and $1.1 million of related
costs). A portion of these proceeds was used to repay $12.0 million in principal
of the Senior Notes, as well as accrued interest of $653,000 and a related
prepayment penalty of $1.7 million. Approximately $9.2 million was used to pay a
distribution of undistributed earnings to the Company's S corporation
stockholders. The distribution consisted of all of the Company's previously
taxed and undistributed earnings as of March 22, 1994, plus the Company's
previously undistributed earnings for financial reporting purposes in excess of
the previously taxed earnings at March 22, 1994, less a reserve of $1.2 million
for the amount of the deferred income taxes payable on such excess. The
remainder of the proceeds have been used for working capital and general
corporate purposes.
In February 1995, the Company entered into a modified loan agreement with
NationsBank of Tennessee N.A. ("NationsBank") which replaced a loan agreement
entered into with NationsBank in the first quarter of 1994. The loan agreement,
as modified, provides for a revolving credit facility of up to $10.0 million,
which will expire on May 31, 1998.
Amounts outstanding under the revolving facility are unsecured and bear
interest at a floating rate equal to, at the Company's option, either the
NationsBank prime commercial rate minus 1.0% or LIBOR plus 1.15% (or LIBOR
plus 1.0% if the minimum advance is at least $1.0 million). The loan
agreement contains customary financial and operating restrictions on the
Company, including covenants restricting the Company, without NationsBank's
consent, from pledging its inventory, accounts receivable or other assets to
other lenders or from acquiring any other businesses if the aggregate
expenditures by the Company in connection with such acquisitions would exceed
a certain threshold in any fiscal year. In addition, the Company is
prohibited from declaring or paying any dividend if an
15
event of default exists under the revolving credit facility at the time of,
or would occur as a result of, such declaration or payment. The loan
agreement also contains customary covenants requiring the satisfaction of
certain financial tests and the maintenance of certain financial ratios,
including covenants requiring the Company to maintain a tangible net worth of
not less than $25.0 million, working capital of not less than the greater of
$10.0 million or 15% of revenues, as computed on a rolling 12 month basis, a
ratio of total debt divided by net worth of not more than 1 to 1, and a ratio
of current assets to current liabilities of not less than 1.5 to 1. The
Company is in compliance with all such covenants. The outstanding principal
balance of the Company's borrowings under the revolving facility as of
December 31, 1996 was $2.3 million, compared to $3.6 million at December 31,
1995.
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 the Company's inventory management program)
generally provide that payments are due within either 90 or 120 days following
the date of shipment. Under the Company's inventory management program, sales
are recorded when the product is used by the customer, and payments typically
are due within 30 days thereafter. Due to the continuing expansion of the
Company's foreign sales, management believes that the Company's working capital
requirements will increase as a result of longer payment terms provided to
foreign customers. Currently, all foreign sales are billed and paid for in
United States dollars.
To date, the Company has not been materially adversely affected by currency
fluctuations or foreign exchange restrictions. However, approximately 94% of the
steel used by the Company is 52100 Steel, and 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. 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. Because of the shortage, the Company also incurred increased
transportation costs for finished products in order to meet customer delivery
requirements. During 1996, the steel shortage abated and the Company was able to
obtain an adequate supply of 52100 Steel on a timely basis. The Company has
obtained informal commitments for 52100 Steel in 1997 that exceed its projected
usage. The Company typically reserves with its customers the right to increase
product prices periodically in the event of increases in its raw material costs.
As the Company's international operations continue to grow, foreign exchange
risk can be expected to increase, and the Company may be required to develop and
implement additional strategies, such as entering into foreign currency exchange
contracts, to manage this risk.
Working capital, which consists principally of cash and cash equivalents,
accounts receivable and inventories, was $18.4 million at December 31, 1996, as
compared to $13.4 million at December 31, 1995. The ratio of current assets to
current liabilities increased to 3.2:1 at December 31, 1996, from 2.0:1 at
December 31, 1995. This increase was due primarily to a decrease in accounts
payable and amounts drawn on the revolving credit facility. Cash flow from
operations increased to $12.7 million during 1996 from $9.5 million during 1995.
This increase is primarily attributable to an increase in net income and
depreciation.
Total capital expenditures for 1996 were approximately $8.4 million, all of
which was spent in the purchase of new machinery and equipment for the Company's
facilities. These capital expenditures were financed with cash generated from
operations and funds available under the credit facility described above. In
January, 1997, the Company purchased the building and an approximately 8 acre
tract of land on which the Mountain City, Tennessee facility is located, for an
aggregate purchase price of $321,878 (including $2,353 of closing fees and
related expenses).
During 1997, the Company plans to spend an additional $6 million on capital
expenditures, including the purchase of additional machinery and equipment for
all three 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
16
sufficient to finance the Company's working capital needs and capital
expenditure requirements through December 1997.
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 repurchase program will remain in effect until the earlier of the
completion of the purchase of the shares or November 30, 1997. The program may
be extended or discontinued at any time, and there is no assurance that the
Company will repurchase the full amount authorized. The Company did not
repurchase any shares under the program during 1996. In February 1997, the
Company repurchased 86,000 shares at an aggregate purchase price of $999,750.
The Company believes that funds generated from operations and borrowings from
the credit facility will be sufficient to finance any additional stock
repurchases under the program.
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, 1996
and 1995, see Note 13 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 1996 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 already have been discussed
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 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 publicly update 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.
17
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 facility in Mountain City, Tennessee,
and with its plant expansions.
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, 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." Currently, all foreign
sales are billed and paid for in United States dollars. 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.
DEPENDENCE ON MAJOR CUSTOMERS. During 1996, the Company's ten largest
customers accounted for approximately 78% 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
1996, and sales to FAG accounted for approximately 10% of net sales in 1996. 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. None of the
Company's other customers accounted for more than 10% of its net sales in 1996,
but sales to three of its customers each represented more than 5% of the
Company's 1996 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.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: PAGE
-----
Report of Independent Accountants...................................................... 20
Balance Sheets at December 31, 1996 and 1995........................................... 21
Statements of Income for the three years ended December 31, 1996....................... 22
Statements of Changes in Stockholders' Equity for the three years ended December 31,
1996................................................................................. 23
Statements of Cash Flows for the three years ended December 31, 1996................... 24
Notes to Financial Statements.......................................................... 25
Financial Statement Schedules:
For the three years ended December 31, 1996
II--Valuation and Qualifying Accounts and Reserves..................................... 38
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
NN Ball and 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 and
Roller, Inc. at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, 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 require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
January 17, 1997
20
NN BALL AND ROLLER, INC.
BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Assets
Current assets:
Accounts receivable, net.............................................. $ 15,754 $ 16,915
Inventories, net...................................................... 10,408 9,813
Other current assets.................................................. 565 --
--------- ---------
Total current assets................................................ 26,727 26,728
Property, plant and equipment, net...................................... 32,419 27,367
Other................................................................... 146 146
--------- ---------
Total assets........................................................ $ 59,292 $ 54,241
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity[el]
Current liabilities:
Revolving credit facility.............................................. $ 2,308 $ 3,590
Accounts payable--trade................................................ 4,054 8,201
Accrued vacation expense............................................... 370 369
Income taxes payable................................................... 96 208
Accrued sales rebate................................................... 755 243
Other liabilities...................................................... 791 692
--------- ---------
Total current liabilities........................................... 8,374 13,303
Deferred income taxes................................................... 2,208 1,720
--------- ---------
Total liabilities................................................... 10,582 15,023
--------- ---------
Stockholders' equity:
Common stock--$0.01 par value, authorized--45,000 (1996) and 20,000
(1995) shares, issued and outstanding--14,629 (1996) and 14,473
(1995) shares........................................................ 146 144
Additional paid-in capital............................................ 26,983 25,289
Retained earnings..................................................... 21,581 13,785
--------- ---------
Total stockholders' equity.......................................... 48,710 39,218
--------- ---------
Total liabilities and stockholders' equity.......................... $ 59,292 $ 54,241
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
21
NN BALL AND ROLLER, INC.
BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Net sales........................................................................ $ 84,539 $ 77,786 $ 60,487
Cost of products sold............................................................ 56,695 53,912 40,110
--------- --------- ---------
Gross profit..................................................................... 27,844 23,874 20,377
Selling, general and administrative expenses..................................... 4,890 4,249 3,439
Depreciation..................................................................... 3,358 2,364 1,996
--------- --------- ---------
Income from operations........................................................... 19,596 17,261 14,942
Interest expense................................................................. 296 42 354
--------- --------- ---------
Income before provision for income taxes and extraordinary item.................. 19,300 17,219 14,588
Provision for income taxes....................................................... 6,835 5,708 5,704
--------- --------- ---------
Income before extraordinary item................................................. 12,465 11,511 8,884
Extraordinary loss from early extinguishment of debt (net of income tax
benefit of $710)............................................................... -- -- (1,160)
--------- --------- ---------
Net income....................................................................... $ 12,465 $ 11,511 $ 7,724
--------- --------- ---------
--------- --------- ---------
Net income per share (primary):.................................................. $ .83 $ .79
--------- ---------
--------- ---------
Weighted average number of shares outstanding.................................... 15,042 14,583
--------- ---------
--------- ---------
Unaudited pro forma data: (Notes 2 and 3)
Income before provision for income taxes and extraordinary item.................. $ 14,588
Provision for income taxes....................................................... 5,543
---------
Income before extraordinary item................................................. 9,045
Extraordinary item, net.......................................................... (1,160)
---------
Net income....................................................................... $ 7,885
---------
---------
Net income per share (primary):
Income before extraordinary item................................................. $ .66
Extraordinary item, net.......................................................... (.09)
---------
Net income per share............................................................. $ .57
---------
---------
Weighted average number of shares outstanding.................................... 13,716
---------
---------
The accompanying notes are an integral part of these financial statements.
22
NN BALL AND ROLLER, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
- -----------------------------------------------------------------------------
COMMON STOCK
----------------------
ADDITIONAL
NUMBER PAR PAID-IN RETAINED
OF SHARES VALUE CAPITAL EARNINGS TOTAL
----------- --------- --------- --------- ---------
Balance, December 31, 1993..................................... 4,432 $ 44 $ 417 $ 7,723 $ 8,184
Net income................................................... -- -- -- 7,724 7,724
Dividends paid............................................... -- -- -- (1,030) (1,030)
Proceeds from IPO (net)...................................... 2,000 20 24,872 -- 24,892
Sub S-corporation distribution............................... -- -- -- (9,233) (9,233)
----------- --------- --------- --------- ---------
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 13,785 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 $ 26,983 $ 21,581 $ 48,710
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements.
23
NN BALL AND ROLLER, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------------- --------- ---------
Cash flows from operating activities:
Net income................................................................. $ 12,465 $ 11,511 $ 7,724
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................. 3,358 2,364 1,996
Amortization of bond issue costs......................................... -- -- 150
Deferred income taxes.................................................... 488 166 1,382
Changes in operating assets and liabilities:
Accounts receivable.................................................... 1,161 (5,898) (2,910)
Inventories............................................................ (595) (3,563) (917)
Other current assets................................................... (565) 30 490
Accounts payable--trade................................................ (4,147) 4,748 (1,346)
Income taxes payable................................................... (112) (287) 471
Accrued sales rebate................................................... 512 79 --
Other liabilities...................................................... 100 328 (139)
------------- --------- ---------
Net cash provided by operations...................................... 12,665 9,478 6,901
------------- --------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment............................... (8,410) (14,509) (5,231)
Other assets............................................................... -- (23) (16)
------------- --------- ---------
Net cash used for investing activities............................... (8,410) (14,532) (5,247)
------------- --------- ---------
Cash flows from financing activities:
Net receipts (payments) under revolving line of credit..................... (1,282) 3,590 --
Principal payment on long-term debt...................................... -- -- (12,000)
Proceeds from Initial Public Offering--net................................. -- -- 24,892
Sub S-corporation distribution............................................. -- -- (9,233)
Cash dividends............................................................. (4,669) (2,830) (1,030)
Stock options exercised.................................................... 1,696 -- --
------------- --------- ---------
Net cash provided (used) by financing activities..................... (4,255) 760 2,629
------------- --------- ---------
Net increase (decrease) in cash and cash equivalents......................... -- (4,294) 4,283
Cash and cash equivalents at beginning of period............................. -- 4,294 11
------------- --------- ---------
Cash and cash equivalents at end of period................................... $ -- $ -- $ 4,294
------------- --------- ---------
------------- --------- ---------
The accompanying notes are an integral part of these financial statements.
24
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
NN Ball and Roller, Inc. (the "Company") is a manufacturer of balls and
rollers used primarily in the bearing industry. The Company has two
manufacturing facilities in Tennessee and one manufacturing facility in South
Carolina. The Company sells to both foreign and domestic customers (See Note
10).
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 recognizes a sale when goods are shipped and ownership is
assumed by the customer. The Company has implemented an inventory management
program for three major customers. Under this program, sales are recognized when
products are used by the customer, instead of at the time of shipment. Inventory
on consignment at December 31, 1996 and 1995 was approximately $2,610,000 and
$1,840,000, 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 11).
25
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
HISTORICAL NET INCOME PER COMMON SHARE
Primary earnings per share is computed by dividing net income by the
weighted average number of common and dilutive common equivalent shares
outstanding during the year (See Note 3). 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.
PRO FORMA NET INCOME PER COMMON SHARE (UNAUDITED)
Pro forma net income per common share (unaudited) is computed using the
weighted average number of common shares (weighted average shares) outstanding
during the period (See Notes 2 and 3).
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 (See Note 14).
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--INITIAL PUBLIC OFFERING AND CAPITAL CHANGES
On March 22, 1994, the Company completed an initial public offering of
common stock in which 2,000,000 shares of common stock (prior to adjustment for
stock splits discussed in Note 3) were issued and sold by the Company at $14 per
share for gross proceeds of $28,000,000. In connection with the offering, the
Company incurred issuance costs of $3,108,000 which have been recorded as a
reduction in additional paid-in capital. Net proceeds to the Company were
$24,892,000. A portion of the proceeds was used to prepay $12,000,000 in
principal of the Company's 10.88% Senior Secured Notes (the "Senior Notes") due
September 29, 1999, to pay $653,000 of accrued interest on the Senior Notes and
to pay a prepayment penalty of $1,728,000 on the Senior Notes.
26
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
This prepayment resulted in an extraordinary loss calculated as follows:
Prepayment penalty.............................................. $1,728,000
Write-off unamortized deferred loan costs....................... 142,000
---------
Gross extraordinary loss........................................ 1,870,000
Tax benefit..................................................... (710,000)
---------
Net extraordinary loss.......................................... $1,160,000
---------
---------
The extraordinary loss has been included in the Company's results of
operations for the year ended December 31, 1994. A portion of the proceeds also
was used to pay a distribution of previously undistributed earnings of
$9,233,000 to S corporation stockholders (the "Final Distribution"). The Final
Distribution consisted of the Company's previously taxed undistributed earnings
as of March 22, 1994, as well as the Company's earnings for financial reporting
purposes in excess of such previously taxed earnings at March 22, 1994, less an
additional reserve of $1,213,000 for the amount of the deferred income taxes
payable on such excess (See Note 11).
Effective January 27, 1994, the Company was recapitalized. The
recapitalization included a Common Stock split with a ratio of 508 to one. This
resulted in Common Stock, $0.01 par value, 20,000,000 shares authorized,
4,432,300 shares issued and outstanding (prior to adjustment for stock splits
discussed in Note 3) prior to the initial public offering. Pursuant to the
recapitalization, the Company was also authorized to issue 5,000,000 shares of
Preferred Stock, $0.01 par value. This recapitalization of the Company has been
given retroactive effect in the accompanying financial statements.
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.
27
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
NOTE 4--ACCOUNTS RECEIVABLE
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Trade................................................................... $ 15,516 $ 17,021
Employees............................................................... 84 9
Other................................................................... 394 --
--------- ---------
15,994 17,030
Less--Allowance for doubtful accounts................................... 240 115
--------- ---------
$ 15,754 $ 16,915
--------- ---------
--------- ---------
NOTE 5--INVENTORIES
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Raw materials............................................................ $ 1,452 $ 2,707
Work in process.......................................................... 2,586 3,172
Finished goods........................................................... 6,430 3,994
--------- ---------
10,468 9,873
Less--Reserve for excess and obsolete inventory.......................... 60 60
--------- ---------
$ 10,408 $ 9,813
--------- ---------
--------- ---------
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIFE 1996 1995
------------- --------- ---------
(IN THOUSANDS)
Land.......................................................................... $ 282 $ 282
Buildings and improvements.................................................... 10-25 years 6,742 6,117
Machinery and equipment....................................................... 3-10 years 44,174 30,485
Construction in progress...................................................... 1,598 7,514
--------- ---------
52,796 44,398
Less--Accumulated depreciation................................................ 20,377 17,031
--------- ---------
$32,419 $ 27,367
--------- ---------
--------- ---------
28
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
NOTE 7--SHORT-TERM CREDIT FACILITIES
Under the terms of a revolving line of credit agreement with NationsBank of
Tennessee, N.A. ("NationsBank"), the Company may borrow up to $10,000,000
through May 31, 1998. Amounts outstanding under the facility are unsecured, and
the Company selects a floating annual interest rate equal to either the
NationsBank prime commercial rate less 1% or LIBOR plus 1.15%. There was
$2,308,000 and $3,590,000 outstanding under the agreement at December 31, 1996
and 1995, respectively. The interest rate on this borrowing was 7.25% and 7.5%
at December 31, 1996 and 1995, respectively. 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 all such covenants as of December 31, 1996.
Interest paid during 1996, 1995 and 1994 was $321,000, $15,000 and $664,000,
respectively.
NOTE 8--EMPLOYEE BENEFIT PLANS
The Company has a 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 is fully vested at all times.
The contributions by the Company were $140,000, $148,000 and $120,000 in 1996,
1995 and 1994, 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.
29
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
The following table summarizes the changes in the number of shares under
option pursuant to the plan described above: (See Note 3)
NUMBER PER SHARE
OF SHARES OPTION PRICE
---------- -------------
Outstanding at December 31, 1993.................................. --
Granted......................................................... 508,635 $ 6.22
Exercised....................................................... --
----------
Outstanding at December 31, 1994.................................. 508,635
----------
----------
Granted......................................................... 518,250 9.39--11.92
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
----------
----------
Exercisable at December 31, 1996.................................. 348,852
----------
----------
Shares reserved for future grant:
December 31, 1996.............................................. 114,760
----------
----------
On May 6, 1996, one of the Company's officers exercised approximately
150,000 stock options. The exercise price and the market price of the options
at the date of exercise were $6.22 and $25.50, 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. The reduction in taxes payable of approximately $686,000 was
recorded as additional paid-in capital in the accompanying financial
statements.
All options granted in the period January 1, 1995 through December 31,
1996 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
30
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
method and, accordingly, has not recorded compensation expense for each of
the three years ended December 31, 1996. Had compensation cost for the
Company's stock compensation plan been determined based on the fair value 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:
YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
----------- -----------
Net income As reported (000's) $12,465 $11,511
Pro forma (000's) 12,146 11,304
Earnings per share As reported $ .83 $ .79
Pro forma .81 .78
The fair value of each option grant was estimated on actual information
available through December 31, 1996 using the Black-Scholes option-pricing model
with the following assumptions:
Term One year after each 20% vesting date
Risk free interest rate 4.89%, 5.04%, 5.60%, 5.96% and 6.16% for options
exercised in years 2-6, respectively
Dividend yield 1.5% annually
Volatility 31%
Expected forfeitures 0-30%
NOTE 10--SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to customers were concentrated in the following areas:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
Domestic:
Bearing manufacturers 34% 34% 40%
Other 16% 16% 23%
--- --- ---
50% 50% 63%
--- --- ---
Foreign:
Bearing manufacturers 45% 46% 34%
Other 5% 4% 3%
--- --- ---
50% 50% 37%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
31
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
Foreign sales were concentrated in the following geographical regions:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Europe 27% 30% 20%
Canada 5% 4% 4%
South America 6% 3% 5%
Other export 12% 13% 8%
--- --- ---
Total Foreign 50% 50% 37%
--- --- ---
--- --- ---
Two customers accounted for 47% of consolidated sales in 1996. SKF Bearings
Industries and FAG Bearings Corporation represented 37% and 10%, respectively,
of 1996 net sales. The only customer accounting for 10% or more of net sales in
any prior year was SKF Bearing Industries which accounted for 37% and 35% of net
sales during 1995 and 1994, respectively.
NOTE 11--PROVISION FOR INCOME TAXES
Prior to the Company's initial public offering (Note 2), the Company
maintained the status of an S corporation for federal income tax purposes. As an
S corporation, the federal income tax effects of the Company's activities
accrued directly to its stockholders.
The Company records taxes in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires use of 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.
As described in Note 2, on March 22, 1994, the Company completed an initial
public offering. Upon completion of the initial public offering, the Company's S
corporation election was terminated and, accordingly, the Company has been
subject to federal and state income taxes from that date forward. In addition,
upon the termination of the Company's S corporation status, the Company was
required to provide for deferred federal and state income taxes, calculated in
accordance with FAS 109 for the cumulative temporary differences between the
financial reporting and income tax bases of the Company's assets and
liabilities. As a result, a charge to the provision for income taxes in the
amount of $1,213,000 and a corresponding increase in the deferred income tax
liability was recorded upon termination of the Company's S corporation status.
32
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Current
Federal $ 5,696 $ 4,978 $ 3,790
State 651 564 532
--------- --------- ---------
6,347 5,542 4,322
--------- --------- ---------
Deferred
Federal 436 149 1,387
State 52 17 (5)
--------- --------- ---------
488 166 1,382
--------- --------- ---------
$ 6,835 $ 5,708 $ 5,704
--------- --------- ---------
--------- --------- ---------
A reconciliation of taxes based on the federal statutory rate of 35% for the
years ended December 31, 1996, 1995 and 1994 is summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Income taxes at the federal statutory rate $ 6,755 $ 6,027 $ 5,106
State income taxes, net of federal benefit 457 378 343
Foreign sales corporation benefit (458) (425) (186)
Benefit of S corporation short year -- -- (870)
Beginning C corporation deferred tax liability adjustment -- -- 1,213
Other, net 81 (272) 98
--------- --------- ---------
Provision for income taxes $ 6,835 $ 5,708 $ 5,704
--------- --------- ---------
--------- --------- ---------
33
NN BALL AND ROLLER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------
The tax effects of the temporary differences are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(IN THOUSANDS)
Deferred income tax liability
Tax in excess of book depreciation $ 2,754 $ 2,092
--------- ---------
Gross deferred income tax liability 2,754 $ 2,092
--------- ---------
Deferred income tax assets
Inventories 211 134
Vacation reserve 135 135
Other working capital accruals 200 103
--------- ---------
Gross deferred income tax assets 546 372
--------- ---------
Net deferred income tax liability $ 2,208 $ 1,720
--------- ---------
--------- ---------
Income tax payments were approximately $5,767,000, $5,782,000 and $3,075,000
in 1996, 1995 and 1994, respectively.
Pro Forma Provision for Income Taxes (unaudited)
The unaudited pro forma provisions for income taxes represent the estimated
income taxes that would have been reported had the Company been a C
corporation for the entire year ended December 31, 1994. As the unaudited pro
forma provision for income taxes assumes the Company has always been a C
corporation, 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 above. Such amounts are summarized as follows:
YEAR ENDED
DECEMBER 31, 1994
-----------------
(IN THOUSANDS)
Current
Federal $ 4,613
State 811
---------
5,424
---------
Deferred
Federal 101
State 18
---------
119
---------
Unaudited pro forma provisions
for income taxes $ 5,543
---------
---------
34
NN BALL AND ROLLER INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- ------------------------------------------------------------------------------
A reconciliation of taxes based on the federal statutory rate of 35% and the
unaudited pro forma provisions for income taxes is summarized as follows:
Year ended
December 31, 1994
-----------------
(in thousands)
Income taxes at the federal statutory rate................ $ 5,106
State income taxes, net of federal benefit................ 539
Foreign sales corporation benefit......................... (186)
Other, net................................................ 84
---------
Unaudited pro forma provision for income taxes............ $ 5,543
---------
---------
NOTE 12--COMMITMENTS
The Company has operating lease commitments for machinery and office
equipment which expire on varying dates. Rent expense for 1996, 1995, and
1994 was $378,000, $242,000, and $167,000, respectively. The following is a
schedule by year of future minimum lease payments as of December 31, 1996
under operating leases that have initial or remaining noncancelable lease
terms in excess of one year (in thousands).
YEAR ENDED
DECEMBER 31,
- -----------------
1997 $ 67
1998 51
1999 51
2000 30
2001 0
- --------- ---
Total minimum lease payments $199
---
---
35
NN BALL AND ROLLER INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- ------------------------------------------------------------------------------
NOTE 13--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995 (in thousands, except per share
data). The sum of the quarterly earnings per share amounts for 1995 do not
equal earnings per share for the year due to the offering of common shares
and changes in the market price of the Company's common stock during the year.
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
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
Per share: (Note 3)................................................... .28 .23 .15 .17
Weighted average number of shares outstanding (Notes 2 and 3)......... 15,071 15,131 14,961 14,903
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- --------- ---------
Net sales............................................................. $ 18,256 $ 18,986 $ 18,940 $ 21,604
Gross profit.......................................................... 5,873 5,699 5,594 6,708
Net income............................................................ 2,832 2,816 2,677 3,186
Per share: (Note 3)................................................... .20 .20 .19 .21
Weighted average number of shares outstanding (Notes 2 and 3)......... 14,473 14,473 14,473 14,914
36
NN BALL AND ROLLER INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
- ------------------------------------------------------------------------------
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1996 includes certain
financial instruments. Management believes the fair value of the these
instruments approximates their carrying value. The carrying amounts and
estimated fair value of the Company's financial instruments at December 31,
1996 and 1995 are as follows (in thousands):
DECEMBER 31,
-------------------------------------------
1996 1995
-------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ----------- --------- -------
Assets:
Cash and cash equivalents $-- $ -- $ -- $ --
Trade accounts receivable 15,516 15,516 17,021 17,021
Less: allowance for doubtful accounts (240) -- (115) --
Liabilities:
Revolving credit facility 2,308 2,308 3,590 3,590
37
SCHEDULE II
NN Ball and Roller, Inc.
Valuation and Qualifying Accounts and Reserves
BALANCE AT BALANCE
BEGINNING AT END
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS(1) OF YEAR
- ------------------------------------------------------------------ ------------- ----------- ----------------- -----------
(IN THOUSANDS)
Year ended December 31, 1994
Allowance for doubtful accounts................................... $ 50 $ 25 $ -- $ 75
----- ----- ----- -----
----- ----- ----- -----
Reserve for excess and obsolete inventory......................... $ 60 $ -- $ -- $ 60
----- ----- ----- -----
----- ----- ----- -----
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
----- ----- ----- -----
----- ----- ----- -----
- ------------------------
(1) Deductions represent amounts written off.
38
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, 1996) 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 I 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.
39
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:
PAGE
----
Report of Independent Accountants..................................... 20
Balance Sheets at December 31, 1996 and 1995.......................... 21
Statements of Income for the Three Years Ended December 31, 1996...... 22
Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1996................................. 23
Statements of Cash Flows for the Three Years Ended December 31, 1996.. 24
Notes to Financial Statements......................................... 25
(a) 2. Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves........... 38
(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).
40
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 Loan Agreement, dated as of February 10, 1995, between the Company and NationsBank of
Tennessee, N.A. (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.9 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).
10.10 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).
10.11* 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).
10.12 Quitclaim Deed, dated January 20, 1997, executed by Johnson County, Tennessee in favor of the
Company (filed herewith).
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 1996.
(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.
41
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, Chief Executive Officer
and Director
Dated: March 24, 1997
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.
NAME AND SIGNATURE TITLE DATE
- ---------------------------------------------- ---------------------------------------------- -----------------
/s/ Richard D. Ennen Chairman, Chief Executive
---------------------------------- Officer and Director
Richard D. Ennen (Principal Executive Officer) March 24, 1997
/s/ James J. Mitchell President, Chief Operating
----------------------------------- Officer and Director March 24, 1997
James J. Mitchell
/s/ Roderick R. Baty Vice President, Chief Financial March 24, 1997
----------------------------------- Officer and Director (Principal
Roderick R. Baty Financial Officer)
/s/ William C. Kelly, Jr. Treasurer, Assistant Secretary March 24, 1997
----------------------------------- and Chief Accounting Officer
William C. Kelly, Jr. (Principal Accounting Officer)
/s/ Deborah Ennen Bagierek Director March 24, 1997
-----------------------------------
Deborah Ennen Bagierek
/s/ Michael D. Huff Director March 24, 1997
-----------------------------------
Michael D. Huff
/s/ G. Ronald Morris Director March 24, 1997
-----------------------------------
G. Ronald Morris
/s/ Michael E. Werner Director March 24, 1997
-----------------------------------
Michael E. Werner
42
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
Number Name of Exhibit
- ------- ---------------
10.12 Quitclaim Deed, dated January 20, 1997, executed by
Johnson County, Tennessee in favor of the Company
23.1 Consent of Price Waterhouse LLP
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.
43