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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
NN, 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.)
2000 Waters Edge Drive
Johnson City, Tennessee 37604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 743-9151
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
---------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding on
March 23, 2001 was 15,246,909.
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 23, 2001, based on the closing price on the NASDAQ
National Market System on that date was approximately $109,587,158.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 2001 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Form 10-K.
1
PART I
Item 1 Business
Overview
NN, 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 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 machines with moving parts. The Company also provides full-service design and
manufacture of plastic injection molded components to the bearing, automotive,
electronic, leisure and consumer markets with an emphasis on value-added
products that take advantage of its capabilities in product development, tool
design and tight tolerance molding processes.
The Company was organized in October 1980 by a group of senior managers
of the ball and roller division of Hoover Precision Products, Inc. (formerly
Hoover Universal, Inc.), led by Richard Ennen, the Company's Chairman. The
Company was founded in order to meet the bearings industry's need for a
dependable source of high quality, precision balls and rollers. During 2000, the
Company sold its products to over 500 customers located in 24 different
countries, and its primary customers included SKF Bearing Industries ("SKF"),
FAG Bearings Corporation ("FAG"), SNR Roulements, and the Torrington Company.
On July 4, 1999, the Company, through a series of wholly owned
subsidiary entities, acquired substantially all of the assets of Earsley Capital
Corporation, formerly known as Industrial Molding Corporation ("IMC"). The
Company currently operates IMC through these subsidiary entities under the name
Industrial Molding Corporation. Formed in 1947, IMC provides full-service design
and manufacture of plastic injection molded components to the bearing,
automotive, electronic, leisure and consumer markets with an emphasis on
value-added products that take advantage of its capabilities in product
development, tool design and tight tolerance molding processes. IMC operates two
manufacturing facilities in Lubbock, Texas.
The Company is also a 50% owner of NN General, LLC, a Delaware limited
liability company, ("NN General"), which owns a 60% position in Jiangsu General
Ball & Roller Company, Ltd. ("JGBR"), a Chinese precision ball and roller
manufacturer located in Rugao City, Jiangsu Providence, China. The Company's
investment includes a cash loan of $3.4 million. The remaining 40% of the
Chinese company is owned by Jiangsu Steel Ball Factory.
On March 12, 2000, the Company experienced a fire at its Erwin,
Tennessee facility. The fire, which was contained to approximately 30% of the
production area, occurred in the early morning hours when only three employees
were in the facility. These employees were immediately evacuated and no one was
injured. Effected production was shifted to the Company's other facilities as
possible as well as to other suppliers to protect product supply to customers.
Production has substantially returned to normal. Insurance coverage was
available for the loss. Negotiations to reach a final settlement with the
insurance carrier are continuing.
On July 31, 2000, the Company formed a majority owned stand-alone
company in Europe, NN Euroball ApS ("Euroball"), for the manufacture and sale of
chrome steel balls used for ball bearings and other products. The Company owns
54% of Euroball. AB SKF and FAG Kugelfisher Georg Shafer AG, the parent
companies of SKF and FAG respectively each own 23%. As part of the transaction,
Euroball acquired the ball factories located in Pinerolo, Italy (previously
owned by SKF), Eltmann, Germany (previously owned by FAG), and Kilkenny, Ireland
(previously owned by the Company).
On August 31, 2000 the Company acquired a 51% ownership interest in NN
Mexico, LLC ("NN Mexico"), a Delaware limited liability company. NN Mexico holds
as its sole investment a 100% ownership interest in NN Arte, a manufacturer of
plastic components located in Guadalajara, Mexico. To acquire its 51% ownership
of NN Mexico, the Company made an initial contribution of $879,000, an
additional contribution of $671,000 and is obligated to provide
2
additional funding of $600,000 payable upon certain performance conditions
at NN Arte. At December 31, 2000, NN Arte had not commenced operations.
For managerial and financial analysis purposes, management views the
Company in three segments. The domestic ball and roller operations of Erwin,
Tennessee, Walterboro, South Carolina and Mountain City, Tennessee ("Domestic
Ball and Roller Division"), the Euroball facilities of Kilkenny, Ireland,
Eltmann, Germany and Pinerolo, Italy ("Euroball Division") and the "Plastics
Division" which consists of IMC and NN Arte.
Products
At its ball and roller facilities in Erwin, Tennessee, Walterboro, South
Carolina and Mountain City, Tennessee, the Company produces high quality,
precision steel balls in sizes ranging in diameter from 3/16 of an inch to 2 1/2
inches and rollers in a limited variety of sizes. At its newly formed Euroball
joint venture, the Company produces high quality steel balls in sizes ranging
from 1/8 of an inch to 12 1/2 inches in diameter. The Company produces balls in
a variety of grades ranging from grade 3 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 3 balls are manufactured to within three millionths
of an inch of roundness and grade 50 rollers are manufactured to within fifty
millionths of an inch of roundness. At its Domestic Ball and Roller Division,
sales of steel balls accounted for approximately 91%, 92% and 92% of the
division's ball and roller net sales in 1998, 1999 and 2000, respectively. Sales
of rollers accounted for the balance of the division's ball and roller sales in
such years.
Precision Steel Balls. The Company manufactures high quality, precision
balls in three different types of steel: 52100 steel, 440C stainless steel and
S2 rock bit steel. Each of the different types of steel has unique
characteristics that make it suitable for particular applications.
During 2000, approximately 98% of the balls produced by the Company's
domestic ball and roller operations were made from 52100 steel ("52100 Steel").
100% of the balls produced by the Company's Euroball joint venture were made
from 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 eleven grades ranging from
grade 1000 to grade 3 (highest precision), and in sizes ranging in diameter from
1/8 of an inch to 12 1/2 inches. The primary grades of the 52100 Steel balls are
grade 16, grade 10 and grade 5 and grade 3.
Precision Steel Rollers. The Company manufactures rollers at its Erwin,
Tennessee facility 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.
IMC, manufactures a wide range of plastic molded products through its
two facilities in Lubbock, Texas. IMC's products can be classified into three
primary market segments - bearing retainers, automotive under the hood
components and other hardware products which include other automotive
components, electronic instrument cases and precision electronic connectors and
lenses as well as a variety of other specialized parts.
Bearing Retainers. IMC manufactures high precision plastic retainers for
ball bearings used in automotive products. During 2000, sales of bearing
retainers accounted for approximately 38% of the Plastics Division sales.
Automotive Components. IMC manufacturers high precision plastic
automotive under the hood parts. These parts utilize high performance engineered
polymers that draw upon IMC's ability to mold highly technical cylindrical
dimension parts. Other molded automotive components include hydraulic
3
cylinders, clutch systems, seat belts, gears and transmission components. During
2000, sales of automotive parts accounted for approximately 25 % of IMC's sales.
Other. IMC also manufactures a variety of high precision molded parts
including plastic instrument cases, seasonal consumer hardware, precision end
connectors and lenses for fiber optics as well as other specialized parts.
During 2000, sales for these items accounted for 37% of IMC's sales.
Sales and Marketing
The Company markets balls and rollers in the United States and abroad
primarily through seven salaried sales employees. Additional internal sales
employees handle customer orders and provide sales support.
IMC markets its products through commissioned sales representatives or
directly through three salaried marketing and sales employees. Four additional
internal customer service employees handle customer orders and provide sales
support. Additionally, certain engineers and manufacturing employees provide
sales support due to the technical nature of the products.
The following table presents a breakdown of the Company's net sales for
fiscal years 1998 through 2000:
2000 1999 1998
(In Thousands)
Domestic Ball and Roller
Division $67,637 $67,736 $73,006
51.2% 79.4% 100%
Euroball Division 33,988 -- --
25.7% -- --
Plastics Division 30,504 17,558 --
23.1% 20.6% --
Total $132,129 $ 85,294 $ 73,006
100% 100% 100%
========== ========= ==========
The Company's marketing strategy relative to the Ball and Roller
Division 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 manufacturers'
needs by purchasing precision components from the Company instead of
manufacturing such components internally.
The Plastic Division's marketing strategy is to increase its share of
the market by offering custom manufactured, high quality, precision parts in a
cost-effective manner. This strategy focuses on relationships with key customers
that require technically difficult parts which enable IMC to take advantage of
its strengths in product development, tool design and tight tolerance molding
processes. IMC has historically focused on the North American market. However,
management believes certain synergies exist between the Domestic Ball and Roller
Division and IMC that will allow IMC to further penetrate the North American
market as well as broaden the European and Asian presence by leveraging the
Company's global relationships.
4
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 customer uses the product, 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." See Note 10 of the Notes to Consolidated Financial
Statements for additional financial information.
Customers
During 2000, the Company's ten largest customers accounted for
approximately 69% of its consolidated 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 32% of net sales in 2000 and sales to FAG
accounted for approximately 17% of net sales in 2000. None of the Company's
other customers accounted for more than 5% of its net sales in 2000.
During 2000, the Domestic Ball and Roller Division sold its products to
more than 500 customers located in 24 different countries. Approximately 50% of
ball and roller net sales in 2000 were to customers outside the United States.
Sales to the Ball & Roller Division's top ten customers accounted for
approximately 78% of the divisions' net sales in 2000. Sales to SKF and FAG
accounted for approximately 35% and 17% of the division's net sales in 2000
respectively.
During 2000, the Euroball Division sold its products to more than 40
customers located in 15 different countries. Approximately 86% of its net sales
in 2000 were to customers within Europe. Sales to the division's top ten
customers accounted for approximately 92% of the divisions' net sales in 2000.
Sales to SKF and FAG accounted for approximately 49% and 28% of the division's
net sales in 2000 respectively
During 2000, the Plastics Division sold its products to 55 customers
located in 12 different countries. Approximately 8% of plastic net sales
were to customers outside the United States. Sales to the division's top ten
customers accounted for approximately 68% of the divisions' net sales in 2000.
Sales to Gary Products Group accounted for approximately 20% of the division's
net sales in 2000.
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" for additional geographic information. In both the
foreign and domestic markets, the Company principally sells its products
directly to manufacturers and not to distributors.
The Company ordinarily ships its products directly to customers within
60 days, but in some cases, in the same calendar month, of the date on which a
sales order is placed. Accordingly, the Company generally has an insignificant
amount of open (backlog) orders from customers at month end. Certain of the
Company's customers have entered into contracts with the Company pursuant to
which they have agreed to purchase all of their requirements of specified balls
and rollers and plastic molded products from the Company, but under which they
are not obligated to purchase any specific amounts. While firm orders generally
are received only monthly, the Company normally is aware of reasonably
anticipated future orders well in advance of the placement of a firm order. The
Company has installed a computerized, bar coded inventory management system with
most of its major customers pursuant to which the Company, through a direct
computer link, automatically monitors the customer's ball and roller
inventories. This system permits the Company to determine on a day-to-day basis
the amount of balls and/or rollers remaining in a customer's inventory. When
such inventories fall below certain levels, the Company automatically ships
additional goods. The Company follows industry practice in handling its
inventory, which is a first in, first out policy.
5
Employees
As of December 31, 2000, the Company had 1,362 full-time employees of
whom 1,206 were engaged in production/maintenance. Of these 1,362 employees, 298
were employed at the Domestic Ball and Roller facilities, 725 at the Euroball
Division, 306 at the Plastics Division and 33 at Corporate Division. The Company
believes that relations with its employees are good.
Competition
The precision ball and roller industry is intensely competitive, and
many of the Company's competitors have 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 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.
The markets for IMC's products are also intensely competitive. Since the
industry is currently very fragmented, IMC must compete with numerous companies
in each of their marketing segments. Many of these companies have substantially
greater financial resources than IMC and many currently offer competing products
nationally and internationally. IMC's primary competitor in the bearing retainer
segment is Nakanishi Manufacturing Corporation. Nypro, Inc. and Key Plastics are
the main domestic competitors in the automotive segment.
The Company believes that competition within the plastic injection
molding industry is based principally on quality, price, design capabilities and
speed of responsiveness and delivery. Management believes that IMC's competitive
strengths are product development, tool design and fabrication and tight
tolerance molding processes as well as its reputation in the marketplace as a
quality producer of technically difficult products.
Raw Materials
The primary raw material used by the Company in its Domestic Ball and
Roller Division and Euroball Division is 52100 Steel. During 2000, approximately
98% and 100% of the steel used by these two divisions, respectively was 52100
Steel. The Company's other steel requirements include type 440C stainless steel
and type S2 rock bit steel. The Domestic Ball and Roller Division 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 required by
the Company. The Euroball Division purchases all of its 52100 Steel requirements
from European mills. 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 is principally produced by foreign manufacturers,
the Company's operating results would be negatively affected in the event that
the U.S. or European governments imposes any
6
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.
The primary raw materials used by IMC are engineered resins and
polypropylene resins. Injection grade nylon is utilized in bearing retainers,
automotive and other industrial products and polypropylene is utilized for
seasonal hardware products. The Company purchases substantially all of its resin
requirements from domestic manufacturers and suppliers. The majority of these
suppliers are international companies with resin manufacturing facilities
located throughout the world.
The Company bases purchase decisions on price, quality and service.
Generally, the Company does not enter into written supply contracts with its
suppliers or commit itself to maintain minimum monthly purchases of resins. The
pricing arrangements with its suppliers typically can be adjusted at anytime.
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.
Seasonal Nature of Business
Historically, due to increased sales to foreign customers, 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.
In the past, 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 at one of its ball and roller facilities. The
remediation project is now 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.
7
Executive Officers of the Registrant
The executive officers of the Company consist of the following persons:
Name Age Position
---- --- --------
Richard D. Ennen 73 Chairman of the Board and Director
Roderick R. Baty 47 President, Chief Executive Officer and Director
Frank T. Gentry, III 45 Vice President - Manufacturing
Robert R. Sams 43 Vice President - Market Services
David L. Dyckman 36 Vice President - Business Development and Chief
Financial Officer
William C. Kelly, Jr. 42 Treasurer, Secretary and Chief Accounting Officer
Biographical Information. Set forth below is certain additional
information with respect to each executive officer of the Company.
Richard D. Ennen is the principal founder of the Company and has been
the Chairman of the Board and a director of the Company since its formation in
1980. He served as Chief Executive Officer of the Company from its inception
until 1997 and as President of the Company from its inception until 1990. In
recent years, Mr. Ennen has focused on the development and implementation of the
Company's business strategy, rather than the day-to-day operations of the
Company. Prior to forming the Company, Mr. Ennen held various management and
executive positions with Hoover Precision Products, Inc. (formerly Hoover
Universal, Inc.), a division of Tsubakimoto Precision Products Co. Ltd,
including Corporate Vice President and General Manager of the ball and roller
division. Mr. Ennen has over 40 years of experience in the anti-friction bearing
industry.
Roderick R. Baty became President and Chief Executive Officer in July
1997. He joined the Company in July 1995 as Vice President and Chief Financial
Officer and was elected to the Board of Directors in 1995. Prior to joining the
Company, Mr. Baty served as President and Chief Operating Officer of Hoover
Precision Products from 1990 until January 1995, and as Vice President and
General Manager of Hoover Precision Products from 1985 to 1990.
Frank T. Gentry, III, was originally appointed Vice President -
Manufacturing in August 1995. Mr. Gentry's responsibilities include purchasing,
inventory control and transportation. Mr. Gentry joined the Company in 1981 and
held various production control positions within the Company from 1981 to August
1995.
Robert R. Sams joined the Company in 1996 as Plant Manager of the
Mountain City, Tennessee facility. In 1997, Mr. Sams served as Managing Director
of the Kilkenny facility and in 1999 was elected to the position of Vice
President - Market Services. Prior to joining the Company, Mr. Sams held various
positions with Hoover Precision Products from 1980 to 1994 and most recently as
Vice President of Production for Blum, Inc. from 1994 to 1996.
David L. Dyckman was appointed Vice President of Business Development
and Chief Financial Officer in April 1998. Prior to joining the Company, Mr.
Dyckman served from January 1997 until April 1998 as Vice President--Marketing
and International Sales for the Veeder-Root Division of the Danaher Corporation.
From 1987 until 1997, Mr. Dyckman held various positions with Emerson Electric
Company including General Manager and Vice President of the Gearing Division of
Emerson's Power Transmission subsidiary.
8
William C. Kelly, Jr. joined the Company in 1993 as Assistant Treasurer
and Manager of Investor Relations. In July 1994, Mr. Kelly was elected to serve
as the Company's Chief Accounting Officer, and in February 1995, was elected
Treasurer and Assistant Secretary. In March 1999 he was elected Secretary of the
Company. 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
PricewaterhouseCoopers LLP.
Item 2 Properties
The Company has three domestic ball manufacturing facilities located in
Erwin, Tennessee, Walterboro, South Carolina and Mountain City, Tennessee.
Rollers are only produced at the Erwin, Tennessee facility. 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 on an 8 acre tract of land
owned by the Company.
Through its newly formed joint venture company, Euroball, the Company
manufactures high precision steel balls in three manufacturing facilities
located in Kilkenny, Ireland, Eltmann, Germany and Pinerolo, Italy. The
facilities currently have approximately 136,000, 54,000 and 112,000 square feet
of manufacturing space, respectively. The Kilkenny facility is located on a two
acre tract owned by Euroball, the Eltmann facility is leased from FAG and the
Pinerolo facility is located on a 9 acre tract owned by Euroball.
Industrial Molding Corporation manufactures a wide range of plastic
molded products through two facilities located in Lubbock, Texas. The Slaton
facility, located on a 6.5 acre tract of land owned by the Company, contains
approximately 193,000 square feet of manufacturing, warehouse and office space.
The Cedar facility is situated on a 2.5 acre tract of land which is also owned
by the Company and contains approximately 35,000 square feet of manufacturing
and warehouse space.
During 2000, 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."
Item 3 Legal Proceedings
All legal proceedings and actions involving the Company are of an
ordinary and routine nature and are incidental to the operations of the Company.
Management believes that such proceedings should not, individually or in the
aggregate, have a material adverse effect on the Company's business or financial
condition or on the results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of stockholders during the fourth
quarter of 2000.
Part II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
None.
Item 6 Selected Financial Data
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the Financial Statements and
the Notes thereto included as Item 8. The data set forth below as of December
31, 2000 has been derived from the Financial Statements of the Company which
9
have been audited by KPMG LLP, independent accountants, whose report thereon is
included as part of Item 8. The data below as of December 31, 1999 and for each
of the three years in the period ended December 31, 1999 have been derived from
the Financial Statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. 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."
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Statement of Income Data:
Net Sales $132,129 $85,294 $73,006 $75,252 $84,539
Cost of products sold 93,926 59,967 50,353 51,707 56,695
--------- -------- -------- -------- --------
Gross profit 38,203 25,327 22,653 23,545 27,844
Selling, general and administrative
expenses 11,571 6,854 5,896 5,518 4,890
Depreciation and amortization 9,165 6,131 4,557 4,106 3,358
--------- -------- -------- -------- --------
Income from operations 17,467 12,342 12,200 13,921 19,596
Interest expense 1,773 523 64 29 296
Equity in earnings of unconsolidated
affiliate (48) -- -- -- --
Gain on involuntary conversion (728) -- -- -- --
Other income (136) -- -- -- --
--------- -------- -------- -------- --------
Income before provision for income 16,606 11,819 12,136 13,892 19,300
taxes
Provision for income taxes 5,959 4,060 4,480 5,382 6,835
Minority interest in income of
consolidated Subsidiary 660 -- -- -- --
--------- -------- -------- -------- --------
Net Income $9,987 $7,759 $7,656 $8,510 $12,465
========= ======== ======== ======== ========
Basic income per share: $0.66 $0.52 $0.52 $0.57 $ 0.83
========= ======== ======== ======== ========
Diluted income per share $0.64 $0.52 $0.52 $0.57 $0.83
========= ======== ======== ======== ========
Operating income per share $1.15 $0.81 $0.82 $0.94 $1.30
========= ======== ======== ======== ========
Dividends declared $0.32 $0.32 $0.32 $0.32 $0.32
========= ======== ======== ======== ========
Weighted average number of shares 15,247 15,021 14,804 14,804 15,042
Outstanding - Basic ========= ======== ======== ======== ========
Balance Sheet Data: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Current assets $64,038 $34,397 $28,571 $26,185 $26,727
Current liabilities 35,859 10,478 7,638 7,471 8,374
Total assets 187,808 91,363 66,860 63,273 59,292
Long-term debt 50,515 17,151 0 0 0
Stockholders' equity 62,246 60,128 56,242 52,971 48,710
10
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 2000, sales of balls and rollers accounted
for approximately 77% of the Company's total net sales. Of this 77%, balls
accounted for 72% and rollers accounted for 5%. Sales of precision molded
plastic parts accounted for the remaining 23%. See Note 10 of the Notes to
Financial Statements.
Since the Company was formed, growth factors 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. Sales of high precision balls
produced by the Company for use in quiet bearing applications has grown to
approximately 85% of total net ball sales. Management believes that the
Company's sales growth since its formation has been due to its ability to
capitalize on opportunities in overseas markets and provide precision balls at
competitive prices, as well as its emphasis on product quality and customer
service.
As a result of changing dynamics in the marketplace, the Company
developed and is implementing an extensive new long-term growth strategy
involving both its core business and opportunities beyond the core markets that
are consistent with the Company's strengths and culture.
On July 4, 1999, the Company, acquired substantially all of the assets
of Earsley Capital Corporation, formerly known as Industrial Molding Corporation
("IMC"). Formed in 1947, IMC provides full-service design and manufacture of
plastic injection molded components to the bearing, automotive, electronic,
leisure and consumer markets with an emphasis on value-added products that take
advantage of its capabilities in product development, tool design and tight
tolerance molding processes. IMC operates two manufacturing facilities in
Lubbock, Texas. During 2000, IMC sold its products to approximately 55 customers
in 12 different countries.
On March 16, 2000, the Company entered into a 50/50 joint venture with
General Bearing Corporation called NN General LLC ("NN General"), which owns a
60% position in Jiangsu General Ball & Roller Company, Ltd. ("JGBR"), a Chinese
precision ball and roller manufacturer located in Rugao City, Jiangsu
Providence, China. The Company's investment includes a cash loan of $3.4
million. The remaining 40% of the Chinese company is owned by Jiangsu Steel Ball
Factory.
On July 31, 2000, the Company formed a majority owned stand-alone
company in Europe, NN Euroball ApS ("Euroball"), for the manufacture and sale of
chrome steel balls used for ball bearings and other products. The Company owns
54% of Euroball. AB SKF and FAG Kugelfisher Georg Shafer AG, the parent
companies of SKF and FAG respectively each own 23%. As part of the transaction,
Euroball acquired the ball factories located in Pinerolo, Italy (previously
owned by SKF), Eltmann, Germany (previously owned by FAG), and Kilkenny, Ireland
(previously owned by the Company). Acquisition financing of approximately 31.5
million euro (approximately $29.7 million) was drawn at closing, and the credit
facility provides for additional working capital expenditure financing. The
Company is required to consolidate Euroball due to its ability to exercise
control over its operations and has accounted for the acquisitions of the
Pinerolo, Italy and Eltmann, Germany ball factories using the purchase method of
accounting. Goodwill arising from this acquisition is being amortized on a
straight-line basis over 20 years.
On August 31, 2000 the Company acquired a 51% ownership interest in NN
Mexico, LLC ("NN Mexico"), a Delaware limited liability company. NN Mexico holds
as its sole investment a 100% ownership interest in NN Arte, a manufacturer of
plastic components located in Guadalajara, Mexico. To acquire its 51% ownership
of NN Mexico, the Company made an initial contribution of $879,000, an
additional contribution of $671,000 and is obligated to provide
11
additional funding of $600,000 payable upon certain performance conditions
at NN Arte. The Company is required to consolidate NN Mexico due to its ability
to exercise control over NN Arte's operations and has accounted for this
acquisition using the purchase method of accounting. At December 31, 2000, NN
Arte had not commenced operations.
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,
2000 1999 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of product sold 71.1 70.3 69.0
-------- -------- --------
Gross profit 28.9 29.7 31.0
Selling, general and administrative expenses 8.8 8.0 8.1
Depreciation and amortization 6.9 7.2 6.2
-------- -------- --------
Income from operations 13.2 14.5 16.7
Interest expense 1.3 0.6 0.1
Equity in earnings of unconsolidated affiliates -- -- --
Gain on involuntary conversion (0.6) -- --
Other income (0.1) -- --
-------- -------- --------
Income before provision for income taxes 12.6 13.9 16.6
Provision for income taxes 4.5 4.8 6.1
Minority interest in income of consolidated
subsidiary 0.5 -- --
-------- -------- --------
Net income 7.6 9.1 10.5
======== ======== ========
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Sales. The Company's net sales increased $46.8 million or 54.9%,
from $85.3 million in 1999 to $132.1 million in 2000. The formation of Euroball
in August of 2000 contributed $30.4 million of the increase, excluding the third
and fourth quarter sales of the Ireland facility, which were consolidated into
the results of the Company prior to the formation of Euroball. Additionally the
inclusion of a full year of IMC's net sales contributed $15.6 million. The
Company acquired IMC on July 4, 1999, thus six months of IMC's results were
included in the Company's 1999 results. The remainder of the increase is due to
increased ball and roller sales in the first half of the year, offset by slowing
domestic demand for balls and rollers in the second half of the year. The
Company experienced decreased sales in the second half of the year for the
Plastics Division due primarily to decreased sales to one customer.
12
Gross Profit. Gross profit increased by $12.9 million, or 50.8% from
$25.3 million in 1999 to $38.2 million in 2000. Net of the Ireland facility's
third and fourth quarter gross profit, the Euroball joint venture accounted for
$7.5 million of the increase. The inclusion of a full year of IMC's gross profit
contributed an additional $4.0 million in gross profit. The remainder of the
increase is primarily attributed to increased sales at the Domestic Ball and
Roller Division. To a lesser degree, decreased costs as a percentage of sales at
the Domestic Ball and Roller Division contributed to the increase in gross
profit. This was due mainly to inventory builds during the fourth quarter of
2000. As a percentage of net sales, gross profit decreased from 29.7% in 1999 to
28.9% in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.7 million, or 68.8% from $6.9 million in
1999 to $11.6 million in 2000. The Euroball Division, net of the Ireland
facility, accounted for $2.4 million of the increase. The inclusion of a full
year of IMC's results accounted for $1.6 million of the increase. The remainder
of the increase is primarily attributed to increased administrative expenses
associated with the Company's business development activity during the year. As
a percentage of net sales, selling, general and administrative expenses
increased from 8.0% in 1999 to 8.8% in 2000.
Depreciation and Amortization. Depreciation and amortization expenses
increased $3.0 million, or 49.5% from $6.1 million in 1999 to $9.2 million in
2000. The addition of Euroball, adjusting for the Ireland facility, accounted
for $2.4 million of the increase. The inclusion of a full year of IMC's results
accounted for the remainder of the increase. As a percentage of net sales,
depreciation and amortization decreased from 7.2% in 1999 to 6.9% in 2000.
Interest Expense. Interest expense increased by $1.2 million from
$523,000 in 1999 to $1.8 million in 2000. Interest expense related to the debt
incurred by Euroball to finance the joint venture transaction accounted for
$622,000 of the increase. Additionally, the inclusion of a full year of interest
expense related to the purchase of the IMC business accounted for approximately
$500,000 of the increase. The remainder of the increase is due to increased
expenditures associated with the Company's business development activity during
2000. Additionally, the timing of expenditures associated with the March 12,
2000 fire and the reimbursement of insurance proceeds has caused an increase in
the levels outstanding under the Company's domestic line of credit. As a
percentage of net sales, interest expense increased from 0.6% in 1999 to 1.3% in
2000. See "Management's Discussion and Analysis of Financial Condition -
Liquidity and Capital Resources."
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates increased $48,000 from $0 in 1999 to $48,000. The
increase is due to the Company's share of earnings from the NN General joint
venture with General Bearing Corporation. Earnings from this venture were offset
by losses incurred from the start-up of the marketing arm of this venture and
losses sustained from start-up expenses from the investment in NN Mexico LLC.
Gain on Involuntary Conversion. The Company had a gain on involuntary
conversion of $728,000 in 2000 related to the excess of insurance proceeds over
the net book value of assets destroyed in the fire and direct costs due to the
March 12, 2000 fire at the Erwin facility.
Minority Interest of Consolidated Subsidiary. Minority interest of
consolidated subsidiary increased $660,000 from $0 in 1999 to $660,000 in 2000.
This increase is due entirely to the Euroball joint venture. The Company is
required to consolidate Euroball due to its ability to exercise control over the
operations. The Company owns 54% of the shares of the joint venture with the
minority partners owning the remaining 46%. Minority interest of consolidated
interest represents the combined 46% interest of the minority partners.
Net Income. Net income increased $2.2 million, or 28.7%, from $7.8
million in 1999 to $10.0 million in 2000. As a percentage of net sales, net
income decreased from 9.1% in 2000 to 7.6% in 2000.
13
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net Sales. The Company's net sales increased $12.3 million, or 16.8%,
from $73.0 million in 1998 to $85.3 million in 1999. The IMC acquisition
accounted for $17.6 million in additional sales for the twelve-month period in
1999. Foreign net sales decreased $1.3 million or 3.9%, from $33.7 million in
1998 to $32.4 million in 1999. The decrease in foreign net sales was due
primarily to decreased sales volumes with existing customers, largely due to
general economic conditions in Asia and the impact of the relative strength of
the U.S. dollar against world currencies in the first two quarters of the year.
This was partially offset by the addition of $880,000 in foreign sales
contributed by the IMC acquisition. Domestic net sales increased $13.6
million, or 34.6%, from $39.3 million in 1998 to $52.9 million in 1999. This
increase was primarily due to the IMC acquisition which contributed $16.7
million in domestic sales for 1999. This was partially offset by decreased
domestic sales primarily to one customer.
Gross Profit. Gross profit increased by $2.6 million, or 11.5% from
$22.7 million in 1998 to $25.3 million in 1999. The IMC acquisition accounted
for $4.3 million in increased gross profit but was mostly offset by increased
costs associated with capacity under-utilization in the Ball & Roller division
due to decreased levels of volume during 1999 as well as the short-term impact
of the inventory reduction efforts. As a percentage of net sales, gross profit
decreased from 31.0% in 1998 to 29.7% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $958,000, or 16.2% in 1999 to $6.9 million
from $5.9 million in 1998. The acquisition of IMC accounted for $1.8 million of
the increase offset by decreased spending in the Ball & Roller division. As a
percentage of net sales, selling, general and administrative expenses decreased
slightly to 8.0% in 1999 from 8.1% in 1998.
Depreciation and Amortization Expense. Depreciation expense increased
$1.5 million, or 34.5%, to $6.1 million in 1999 from $4.6 million in 1998. The
acquisition of IMC accounted for $1.2 million of increased depreciation and
amortization expense. The remainder of the increase was due to purchases of
capital equipment at the Company's ball and roller facilities. As a percentage
of net sales, depreciation increased to 7.2% in 1999 from 6.2% in 1998.
Interest Expense. Interest expense increased $459,000 from $64,000 in
1998 to $523,000 in 1999. The increase was due to increased levels outstanding
under the Company's line of credit in 1999. In July of 1999, the Company
borrowed $18.5 million under the line of credit for the purchase of selected
assets of the Earsley Capital Corporation. See "Management's Discussion and
Analysis of Financial Condition --Liquidity and Capital Resources."
Net Income. Net income increased $103,000, or 1.3% from $7.7 million in
1998 to $7.8 million in 1999. As a percentage of net sales, net income decreased
to 9.1% in 1999 from 10.5% in 1998. The decrease in net income as a percentage
of net sales was due primarily to excess capacity at the Company's Ball & Roller
division and a related gross profit margin decrease, increased depreciation
expense and interest expense related to the IMC acquisition. Offsetting these
factors was a slightly lower federal tax rate.
Liquidity and Capital Resources
In July 1997, the Company entered into a loan agreement with First
American National Bank ("First American") which provides for a revolving credit
facility of up to $25 million, expiring on June 30, 2000. In July, 1999, the
Company extended the terms of the loan agreement with First American to expire
on October 30, 2001. Amounts outstanding under the revolving facility are
unsecured and bear interest at a floating rate equal to, at the Company's
option, either LIBOR plus 0.65% or the Fed Funds effective rate plus 1.5%. In
August 2000, the Company entered into an agreement, which provided an additional
$2 million of availability to the revolving credit facility through December 31,
2000. The loan agreement contains customary financial and operating restrictions
on the Company, including covenants, restricting the Company, without First
American's consent, from incurring additional indebtedness from, or pledging any
of its assets to, other lenders and from disposing of a substantial portion of
its assets. In addition, the Company is prohibited from declaring any dividend
if a default exists under the revolving credit facility at the time of, or would
occur as a result of, such declaration. The loan agreement also prohibits sales
of property outside of the ordinary
14
course of business. The loan agreement also contains customary financial
covenants with respect to the Company, including a covenant that the Company's
earnings will not decrease in any year by more than fifty percent of earnings in
the Company's immediately preceding fiscal year. The Company extended and
restated this facility in February 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Subsequent Events."
In July 2000, NN Euroball ApS, and its subsidiaries entered into a loan
agreement with HypoVereinsbank Luxembourg S.A. as agent for Bayerische Hypo-und
Vereinsbank AG of Munich, Germany for a senior secured revolving credit facility
of Euro 5,000,000, expiring on July 15, 2006 and a senior secured term loan of
Euro 36,000,000, expiring on July 15, 2006. On July 31, 2000, upon closing of
the joint venture, NN Euroball ApS borrowed a total of Euro 31,500,000 against
these facilities for acquisition financing. Additional working capital and
capital expenditure financing are provided for under the facility. Amounts
outstanding under the facilities accrue interest at a floating rate equal to
EURIBOR plus an applicable margin of between 1.125% to 2.25% based upon
calculated financial ratios. The loan agreement contains various restrictive
financial and non financial covenants. The Company, as of December 31, 2000, was
in compliance with all such covenants.
The Company's arrangements with its domestic customers typically provide
that payments are due within 30 days following the date of the Company's
shipment of goods, while arrangements with foreign customers (other than foreign
customers that have entered into an inventory management program with the
Company) generally provide that payments are due within either 90 or 120 days
following the date of shipment. Under the Company's inventory management
program, payments typically are due within 30 days after the product is used by
the customer. The Company's net sales historically have not been of a seasonal
nature. However, seasonality has become a factor for the foreign ball and roller
sales in that many foreign customers cease production during the month of
August. The Company also experiences seasonal fluctuation through its Plastics
Division which provides several lines of seasonal hardware. For information
concerning the Company's quarterly results of operations for the years ended
December 31, 2000 and 1999, see Note 14 of the Notes to Financial Statements.
The Company bills and receives payment from some of its foreign
customers in their local currency. To date, the Company has not been materially
adversely affected by currency fluctuations or foreign exchange restrictions.
Nonetheless, as a result of these sales, the Company's foreign exchange risk has
increased. Various strategies to manage this risk are under development and
implementation, including a hedging program. In addition, a strengthening of the
U.S. dollar against foreign currencies could impair the ability of the Company
to compete with international competitors for foreign as well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories, was $28.2 million at December 31, 2000 as compared to $22.9 million
at December 31, 1999. The ratio of current assets to current liabilities
decreased from 3.2:1 at December 31, 1999 to 1.79:1 at December 31, 2000. Cash
flow from operations increased to $24.2 million during 2000 from $17.8 million
during 1999. This increase was primarily attributed to changes in working
capital accounts due to Euroball joint venture transaction completed in August
of 2000.
During 2001, the Company plans to spend approximately $5.3 million on
capital expenditures. The Company intends to finance these activities with cash
generated from operations and funds available under the credit facility
described above. The Company believes that funds generated from operations and
borrowings from the credit facility will be sufficient to finance the Company's
working capital needs and projected capital expenditure requirements through
December 2001.
Subsequent Events
On February 16, 2001, the Company completed the acquisition of all of
the outstanding stock of The Delta Rubber Company, a Connecticut corporation
("Delta") for $22.5 million in cash, of which $500,000 is to be held in escrow
for one year from the date of closing. Delta provides high quality engineered
bearing seals and other precision-molded rubber products to original equipment
manufacturers. NN plans to continue the operation of the Delta business, which
operates a manufacturing facility in Danielson, Connecticut. AmSouth Bank
provided financing for the transaction.
15
In February of 2001, the Company extended and restated the $25 million
revolving credit facility with AmSouth Bank to temporarily increase the facility
to $50 million. The facility will be reduced to $25 million on June 30, 2001 in
anticipation of the Company structuring long-term financing arrangements for
this amount. The original $25 million revolving credit facility will expire on
July 25, 2003. In February 2001, the Company drew $23 million against the new
line to finance the acquisition of Delta. Amounts outstanding under the amended
revolving facility are unsecured and bear interest at a floating rate equal to
LIBOR plus an applicable margin of between 0.65% and 2.15% based upon calculated
financial ratios. The loan contains various restrictive financial and
non-financial covenants. The Company, as of March 23, 2001, was in compliance
with all such covenants.
On March 1, 2001, the Company entered into an agreement with AmSouth
Bank which provides an additional $2 million of availability to the revolving
credit facility through June 1, 2001. At March 23, 2001, the Company had no
amounts outstanding under this agreement.
The Euro
The treaty on European Union provided that an economic and monetary
union be established in Europe whereby a single European currency, the Euro, was
introduced to replace the currencies of participating member states. The Euro
was introduced on January 1, 1999, at which time the value of participating
member state currencies were irrevocably fixed against the Euro and the European
Currency Unit. For the three year transitional period ending December 31, 2001,
the national currencies of member states will continue to circulate but be in
sub-units of the Euro. At the end of the transitional period, Euro bank notes
and coins will be issued, and the national currencies of the member states will
be legal tender no later than June 30, 2002.
The Company currently has operations in Ireland, Germany and Italy,
which are Euro participating countries, and each facility sells product to
customers in many of the participating countries. The functional currency of the
Company's Euroball operations is the Euro.
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, 2000
and 1999, see Note 14 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. 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.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, 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. Readers can identify these
forward-looking statements by the use of such verbs as expects, anticipates,
believes or similar verbs or
16
conjugations of such verbs. 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 differences could be caused
by a number of factors or combination of factors including, but not limited to,
the risk factors described below. Readers are strongly encouraged to consider
these factors when evaluating any such forward-looking statement.
The following paragraphs discuss the risk factors the Company regards as
the most significant, although the Company wishes to caution that other factors
that are currently not considered as significant or that currently cannot be
foreseen may in the future prove to be important in affecting the Company's
results of operations. The Company undertakes no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Industry Risks. Both the precision ball and roller and precision
plastics industries are cyclical and tend to decline in response to overall
declines in industrial production. The Company's sales in the past have been
negatively affected, and in the future very likely would be negatively affected,
by adverse conditions in the industrial production sector of the economy or by
adverse global or national economic conditions generally.
Competition. The precision ball and roller market and the precision
plastics market are highly competitive, and many of manufacturers in each of the
markets 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
pace with such quality improvements. In addition, the Company competes with many
of its ball and roller customers that, in addition to producing bearings, also
internally produce balls and rollers for sale to third parties. The Company
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 significantly expanded its ball and roller
production facilities and capacity over the last several years. During 1997, the
Company purchased an additional manufacturing plant in Kilkenny, Ireland. The
Company continued this expansion in 2000 through its 54% ownership of the NN
Euroball joint venture with SKF and FAG. In addition, the Company invested in
Jiangsu General Ball & Roller Company, a Chinese joint venture specializing in
various types of ball production. The Company's Ball & Roller Division currently
is not operating at full capacity and faces risks of further under-utilization
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 these joint ventures and
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 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.
Risks Associated with International Trade. Because the Company (a)
obtains a majority of its raw materials for the manufacture of balls and rollers
from overseas suppliers, (b) now actively participates in overseas manufacturing
operations and (c) 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 duties or taxes, and (v) unstable governments
or legal systems in countries in which the Company's suppliers, manufacturing
operations, and customers are located. An increase in the value of the United
States dollar relative to foreign currencies adversely affects the ability of
the Company to compete with its foreign-based competitors for international as
well as domestic sales.
17
Dependence on Major Customers. During 2000, the Company's ten largest
customers accounted for approximately 69% of its net sales. Sales to various US
and foreign divisions of SKF, which is one of the largest bearing manufacturers
in the world, accounted for approximately 32% of net sales in 2000, and sales to
FAG accounted for approximately 17% of net sales. None of the Company's other
customers accounted for more than 5% of its net sales in 2000. The loss of all
or a substantial portion of sales to these customers would have a material
adverse effect on the Company's business.
Acquisitions. The Company's growth strategy includes growth through
acquisitions. In 1999, the Company acquired the IMC businesses as part of that
strategy. In 2000, the Company formed the NN Euroball joint venture with SKF and
FAG and began operating two new ball manufacturing facilities. Although the
Company believes that it will be able to continue to integrate the operations of
IMC, NN Euroball and other companies acquired in the future into its operations
without substantial cost, delays or other problems, its ability to do so will
depend on, among other things, the adequacy of its implementation plans, the
ability of its management to effectively oversee and operate the combined
operations of the Company and the acquired businesses and its ability to achieve
desired operating efficiencies and sales goals. If the Company is not able to
successfully integrate the operations of acquired companies into its business,
its future earnings and profitability could be materially and adversely
affected.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
the Company's 2001 reporting cycle. The adoption of this standard by the Company
is not expected to result in significant adjustments to existing accounting
practices as the Company does not currently hold any derivative financial
instruments as of December 31, 2000.
In June 2000 the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133."
SFAS No. 133 and SFAS No. 138 require that all derivative instruments be
recorded on the balance sheet at their respective fair values. SFAS No. 133 and
SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning
after June 30, 2000, which for the Company will be effective January 1, 2001.
The adoption of this standard by the Company is not expected to result in
significant adjustments to existing accounting practices as the Company does not
currently hold any derivative financial instruments or participate in
speculative activities.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in financial market conditions in the
normal course of its business due to its use of certain financial instruments as
well as transacting in various foreign currencies. To mitigate its exposure to
these market risks, the Company has established policies, procedures and
internal processes governing its management of financial market risks.
The Company is exposed to changes in interest rates primarily as a
result of its borrowing activities, which include a $27 million floating rate
revolving credit facility which is used to maintain liquidity and fund its
business operations domestically. Additionally, Euroball has a 5 million euro
floating rate revolving credit facility and a 36.0 million euro floating rate
secured term loan. At December 31, 2000, the Company had $26.7 million
outstanding under the domestic revolving credit facility and Euroball had $25.8
million outstanding under the Euroball revolving credit facility and term loan.
A one-percent increase in the interest rate charged on the Company's outstanding
borrowings under the revolving credit facility would result in interest expense
increasing by approximately $564,000. The nature and amount of the Company's
borrowings may vary as a result of future business requirements, market
conditions and other factors.
The Company's operating cash flows denominated in foreign currencies are
exposed to changes in foreign exchange rates. Beginning in the 1997 fourth
quarter, upon the commencement of production in its Kilkenny, Ireland facility,
the Company began to bill and receive payment from some of its foreign customers
in their own currency. To date, the Company has not been materially adversely
affected by currency fluctuations of foreign exchange restrictions. However, to
help reduce exposure to foreign currency fluctuations, management has
implemented a foreign currency hedging program. The Company did not hold a
position in any foreign currency instruments of December 31, 2000.
18
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements Page
Report of Independent Accountants for the year ended December 31, 2000......20
Report of Independent Accountants for the year ended December 31, 1999
and December 31, 1998.......................................................21
Consolidated Balance Sheets at December 31, 2000 and 1999...................22
Consolidated Statements of Income and Comprehensive Income for the
three years ended December 31, 2000.........................................23
Consolidated Statements of Changes in Stockholder's Equity for the three
years ended December 31, 2000...............................................24
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000...........................................................25
Notes to Consolidated Financial Statements..................................26
19
Independent Auditors' Report
The Board of Directors
NN, Inc.:
We have audited the accompanying consolidated balance sheet of NN, Inc. as of
December 31, 2000 and the related consolidated statement of income and
comprehensive income, consolidated statement of changes in stockholders' equity,
and consolidated statement of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The accompanying consolidated balance
sheet of NN, Inc. as of December 31, 1999 and the related consolidated
statements of income and comprehensive income, changes in stockholder's equity,
and cash flows for each of the years in the two year period ended December 31,
1999, were audited by other auditors whose report, dated February 4, 2000,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NN, Inc. as of
December 31, 2000 and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Charlotte, North Carolina
February 27, 2001
20
Report of Independent Accountants
To the Board of Directors and Stockholders of NN, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of NN,
Inc. (formerly known as NN Ball & Roller, Inc.) and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 4, 2000
21
NN, INC.
Consolidated Balance Sheets
December 31, 2000 and 1999
(In thousands, except per share data)
Assets 2000 1999
------------- -----------
Current assets:
Cash and cash equivalents $ 8,273 1,409
Accounts receivable, net 29,549 18,183
Inventories 23,742 13,122
Other current assets 1,512 688
Net current deferred tax asset 962 995
------------- -----------
Total current assets 64,038 34,397
Property, plant and equipment, net 91,693 43,452
Goodwill, net of accumulated amortization of
$1,297 in 2000 and $325 in 1999 27,865 12,779
Other non-current assets 4,212 735
------------- -----------
Total assets $ 187,808 91,363
============= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 16,883 4,104
Bank overdraft 454 1,239
Accrued salaries, wages and benefits 6,929 234
Income taxes payable 1,341 1,283
Accrued pension 2,133 --
Payable to affiliates 1,762 --
Short-term loans 2,000 --
Other liabilities 4,357 3,618
------------- -----------
Total current liabilities 35,859 10,478
Minority interest in consolidated subsidiaries 30,257 --
Deferred income taxes 5,353 3,606
Long-term debt 50,515 17,151
Other 578 --
------------- -----------
Total liabilities 122,562 31,235
------------- -----------
Stockholders' equity:
Common stock - $0.01 par value, authorized
45,000 shares, issued and outstanding -
15,247 shares in 2000 and 15,244 shares in 1999 153 153
Additional paid-in capital 30,414 30,398
Retained earnings 36,364 31,255
Accumulated other comprehensive income (loss) (1,685) (1,678)
------------- -----------
Total stockholder's equity 65,246 60,128
------------- -----------
Total liabilities and stockholder's equity $ 187,808 $ 91,363
============= ===========
See accompanying notes to consolidated financial statements.
22
NN, INC.
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Years Ended December 31,
2000 1999 1998
------------- ------------ -----------
Net Sales $ 132,129 85,294 73,006
Cost of products sold 93,926 59,967 50,353
------------- ------------ -----------
Gross profit 38,203 25,327 22,653
Selling, general, and administrative expense 11,571 6,854 5,896
Depreciation and amortization 9,165 6,131 4,557
------------- ------------ -----------
Income from operations 17,467 12,342 12,200
Interest expense 1,773 523 64
Equity in earnings of unconsolidated affiliate (48) -- --
Net gain on involuntary conversion (728) -- --
Other income (136) -- --
------------- ------------ -----------
Income before provision for income taxes 16,606 11,819 12,136
Provision for income taxes 5,959 4,060 4,480
Minority interest in consolidated subsidiary 660 -- --
------------- ------------ -----------
Net income 9,987 7,759 7,656
Other comprehensive (loss) income:
Foreign currency translation (7) (1,563) 352
------------- ------------ -----------
Other comprehensive (loss) income (7) (1,563) 352
------------- ------------ -----------
Comprehensive income $ 9,980 6,196 8,008
============= ============ ===========
Basic net income per share $ 0.66 0.52 0.52
============= ============ ===========
Weighted average shares outstanding 15,247 15,021 14,804
============= ============ ===========
Diluted net income per share $ 0.64 0.52 0.52
============= ============ ===========
Weighted average shares outstanding 15,531 15,038 14,804
============= ============ ===========
See accompanying notes to consolidated financial statements.
23
NN, INC.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
Years Ended December 31, 2000, 1999 and 1998
Common Stock Accumulated
Additional Other
Number of Par Paid-in Retained Comprehensive
Shares Value Capital Earnings Income (Loss) Total
------------- ------------- ------------ ------------- ---------------- ----------------
Balance at December 31, 1997 14,804 $ 149 27,902 25,387 (467) 52,971
Net income -- -- -- 7,656 -- 7,656
Dividends paid -- -- -- (4,737) -- (4,737)
Cumulative translation -- -- -- -- 352 352
------------- ------------- ------------ ------------- ---------------- ----------------
Balance at December 31, 1998 14,804 149 27,902 28,306 (115) 56,242
Shares issued 440 4 2,496 -- -- 2,500
Net income -- -- -- 7,759 -- 7,759
Dividends paid -- -- -- (4,810) -- (4,810)
Cumulative translation -- -- -- -- (1,563) (1,563)
------------- ------------- ------------ ------------- ---------------- ----------------
Balance at December 31, 1999 15,244 153 30,398 31,255 (1,678) 60,128
Shares issued 3 -- 16 -- -- 16
Net income -- -- -- 9,987 -- 9,987
Dividends paid -- -- -- (4,878) -- (4,878)
Cumulative translation -- -- -- -- (7) (7)
------------- ------------- ------------ ------------- ---------------- ----------------
Balance December 31, 2000 15,247 $ 153 30,414 36,364 (1,685) 65,246
============= ============= ============ ============= ================ ================
See accompanying notes to consolidated financial statements.
24
NN, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31, 2000, 1999 and 1998
Years ended December 31,
2000 1999 1998
----------- ---------- -----------
Cash flows from operating activities:
Net income $ 9,987 7,759 7,656
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,165 6,131 4,557
Loss on disposals of property, plant and equipment 1,194 43 --
Equity in earnings unconsolidated affiliate (48) -- --
Deferred income taxes 1,185 (369) 149
Interest income from receivable from unconsolidated affiliate (159) -- --
Minority interest in consolidated subsidiary 660 -- --
Changes in operating assets and liabilities:
Accounts receivable 1,955 (641) 806
Inventories (3,021) 5,121 (2,560)
Other current assets (106) 471 432
Other assets (1,719) 19 --
Accounts payable 5,544 (1,439) 789
Other liabilities 2,227 750 858
-------- -------- --------
Net cash provided by operations 26,864 17,845 12,687
-------- -------- --------
Cash flows from investing activities:
Acquisition of NN Euroball ApS (57,788) -- --
Acquisition of Industrial Molding Corporation -- (27,535) --
Long-term note receivable (3,440) -- --
Acquisition of property, plant and equipment (17,910) (2,394) (5,758)
Investment in unconsolidated affiliate (172) -- --
Proceeds from disposals of property, plant and equipment -- 46 --
-------- -------- --------
Net cash used in investing activities (79,310) (29,883) (5,758)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving line of credit 7,547 17,151 (1,480)
Minority shareholder contribution 29,600 -- --
Proceeds from long-term debt 25,817 -- --
Bank overdrafts (785) 1,239 --
Cash dividends (4,878) (4,810) (4,737)
Proceeds from short-term loan 2,000 -- --
Proceeds from issuance of stock 16 -- --
-------- -------- --------
Net cash provided by (used for) financing activities 59,317 13,580 (6,217)
-------- -------- --------
Effect of exchange rate changes (7) (1,563) 352
Net increase in cash and cash equivalents 6,871 1,542 712
Cash and cash equivalents at beginning of period 1,409 1,430 366
-------- -------- --------
Cash and cash equivalents at end of period $ 8,273 1,409 1,430
======== ======== ========
See accompanying notes to consolidated financial statements.
25
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
NN, Inc. (the "Company") is a manufacturer of precision balls,
rollers, and plastic injection molded products. The Company's balls
and rollers are used primarily in the domestic and international
anti-friction bearing industry. The Company's plastic injection
molded products are used in the bearing, automotive, instrumentation,
fiber optic, and consumer hardware industries. The ball and roller
segment comprises three manufacturing facilities located in the
eastern United States. The Company's Euroball segment, which was
acquired in July 2000 (see note 2) comprises manufacturing facilities
located in Kilkenny, Ireland, Eltman, Germany, and Pinerolo, Italy.
All of the facilities in the Euroball segment are engaged in the
production of precision balls and rollers. The plastic injection
molding segment, which was acquired in July 1999, (See note 2) has a
manufacturing facility located in Texas. All of the Company's
segments sell to foreign and domestic customers.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. 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, respectively. The Company reviews the carrying
values of long-lived assets for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. In management's opinion, no material impairment exists
at December 31, 2000 or 1999.
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.
(Continued)
26
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(e) Revenue Recognition
The Company generally recognizes a sale when goods are shipped and
ownership is assumed by the customer. The Company has an inventory
management program for certain major ball and roller customers
whereby sales are recognized when products are used by the customer
from consigned stock, rather than at the time of shipment. Inventory
on consignment at December 31, 2000 and 1999 was approximately $4,083
and $2,766, respectively.
(f) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(g) Net Income Per Common Share
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted
earnings per share include the effect of dilutive stock options
outstanding during the year.
(h) Stock Incentive Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards
Board (FASB) Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25)" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
(Continued)
27
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(i) Principles of Consolidation
The Company's consolidated financial statements include the accounts
of NN, Inc. and subsidiaries in which the Company owns more than
50%. Unconsolidated subsidiaries and investments where ownership is
between 20% and 50% are accounted for under the equity method. All
significant intercompany profits, transactions, and balances have
been eliminated in consolidation. The ownership interests of other
shareholders in companies that are more than 50% owned, but
less than 100% owned, are reflected as minority interests.
Minority interest represents the minority shareholders of NN
Euroball ApS and the minority shareholder of NN Mexico, LLC.
(j) Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiary are
translated at current exchange rates, while revenue and expenses are
translated at average rates prevailing during the year. Translation
adjustments are reported as a component of other comprehensive
income.
(k) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, generally 20 years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill
impairment, if any, is meansred based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(Continued)
28
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(m) 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.
(n) Recently Issued Accounting Standards
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an
Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that
all derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS No. 133 and SFAS No. 138 are effective
for all fiscal quarters of all fiscal years beginning after June 30,
2000, which for the Company will be effective January 1, 2001. The
adoption of this standard by the Company is not expected to result in
significant adjustments to existing accounting practices as
the Company does not currently hold any derivative financial
instruments or participate in speculative activities.
(o) Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform with
the 2000 presentation.
(2) Acquisitions
Effective July 31, 2000, the Company completed its Euroball
transaction. Completion of the transaction required the Company to
start a majority owned stand-alone company in Europe, NN Euroball ApS, for
the manufacture and sale of precision steel balls used for ball bearings
and other products. The Company owns 54% of the shares of NN Euroball,
ApS, AB SKF (SKF), a Swedish Company, and FAG Kugelfischer Georg Schager
AG (FAG), a German Company, own 23% each. NN Euroball ApS subsequently
acquired the steel ball manufacturing facilities located in Pinerolo,
Italy (previously owned by SKF), Eltman, Germany (previously owned by FAG)
and Kilkenny, Ireland (previously owned by the Company). NN Euroball ApS
paid approximately $57,788 for the net assets acquired from SKF and FAG.
The acquisitions of the Pinerolo, Italy and Eltmann, Germany ball
manufacturing facilities have been accounted for by the purchase method of
accounting and, accordingly, the results of operations of Euroball have
been included in the Company's consolidated financial statements from July
31, 2000. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $15,507 has been recorded as goodwill and
is being amortized on a straight-line basis over twenty years.
(Continued)
29
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Under the terms of a Shareholder Agreement between the Company, SKF and
FAG, at any time after December 31, 2002, SKF and FAG can require the
Company to purchase their shares of NN Euroball ApS. The purchase price of
the shares is to be calculated using a purchase price formula specified in
the Shareholder Agreement.
The following unaudited pro forma summary presents the financial
information as if the Company's Euroball transaction had occurred on
January 1, 2000 and 1999. The 1999 unaudited proforma amounts also include
financial information as if the Company's acquisition of IMC had occurred
on January 1, 1999. These proforma results have been prepared for
comparative purposes and do not purport to be indicative of what would
have occurred had the acquisition been made on January 1, 2000 and 1999,
nor is it indicative of future results.
(Unaudited) (Unaudited)
December 31, December 31,
2000 1999
---------------- ---------------
Net sales $ 213,891 187,616
Net income 15,220 7,230
Basic earnings per share 1.00 0.48
Diluted earnings per share 0.98 0.48
Effective July 4, 1999, the Company acquired substantially all of the
assets and assumed certain liabilities of Earsley Capital Corporation, a
Nevada corporation and successor to and formerly known as Industrial
Molding Corporation ("IMC"). IMC, located in Lubbock, Texas, operates as a
premier full-service designer and manufacturer of precision plastic
injection molded components. The Company paid consideration of
approximately $30,000, consisting of $27,500 in cash and 440 shares of its
common stock, for the net assets acquired from IMC. The Company has
accounted for the IMC acquisition using the purchase method of accounting
and, accordingly, the results of operations of IMC have been included in
the Company's consolidated financial statements from July 4, 1999. The
excess of the purchase price over the fair value of the net identifiable
assets acquired of $13,200 has been recorded as goodwill, which is being
amortized, on a straight-line basis over twenty years.
The following unaudited pro forma summary presents the financial
information as if the Company's acquisition of IMC had occurred on January
1, 1999 and 1998. These unaudited proforma results have been prepared for
comparative purposes and do not purport to be indicative of what would
have occurred had the acquisition been made on January 1, 1999 and 1998,
nor is it indicative of future results.
(Unaudited) (Unaudited)
December 31, December 31,
1999 1998
----------------- ----------------
Net sales $ 101,562 101,135
Net income 7,558 6,637
Basic earnings per share 0.50 0.44
Dilutive earnings per share 0.50 0.44
(Continued)
30
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(3) Investments in Affiliated Companies
Investments in affiliated companies consist of 50% of the member interest
of NN General, LLC and 33% of the member interest of NNA, LLC.
NN General, LLC was formed in March 2000 between the Company and General
Bearing Corporation. NN General, LLC owns 60% of the Jiangsu General Ball
and Roller, Company, Ltd., a Chinese precision ball and roller
manufacturer located in Rugao City, Jiangsu, Province, China. The
Company's investment in NN General, LLC includes $215 of member equity and
a note receivable of $3,440 at December 31, 2000 which are included in
other non-current assets in the accompanying consolidated balance sheet.
The note receivable bears interest at variable rates (6.24% at December
31, 2000) and is due December 31, 2020. Accrued interest income on this
note is $159 at December 31, 2000 and is included in other current assets
in the accompanying consolidated balance sheet.
NNA, LLC was formed in March 2000 and is a marketing company designed to
promote the products of NN General, LLC. NNA, LLC is owned equally by the
Company, General Bearing Corporation and the 40% owner of the Jiangsu
General Ball and Roller Company, Ltd. The Company's investment in NNA, LLC
at December 31, 2000 is comprised of $189 of advances for operating
expenses and is included in accounts receivable, net in the accompanying
consolidated balance sheet.
Summarized combined unaudited financial information for the investee
companies as of and for the year ended December 31, 2000 is as follows.
2000
-----------
Assets $ 6,634
Liabilities 6,419
-----------
Net participants' equity $ 215
===========
Revenues $ 7,939
===========
Net Income $ 16
===========
(4) Accounts Receivable
December 31,
2000 1999
---------------------------
Trade $ 29,028 18,918
Employees -- 55
Other 1,297 116
---------------------------
30,325 19,089
Less - Allowance for doubtful accounts 776 906
---------------------------
$ 29,549 18,183
===========================
Allowance for doubtful accounts is as follows:
December 31, 1998
Allowance for doubtful accounts $ 315 271 - 586
=== === === ===
December 31, 1999
Allowance for doubtful accounts $ 586 320 - 906
=== === === ===
December 31, 2000
Allowance for doubtful accounts $ 906 - 130 776
=== === === ===
- ---------------------------------
(1) Deductions represent amounts written off.
(Continued)
31
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(5) Inventories
December 31,
2000 1999
----------------------------
Raw materials $ 4,431 3,131
Work in process 5,265 2,585
Finished goods 14,106 7,466
Less - Inventory reserve 60 60
----------------------------
$ 23,742 13,122
============================
(6) Property, Plant and Equipment
Estimated December 31,
Useful Life 2000 1999
------------- -------------- -------------
Land $ 2,202 841
Buildings and improvements 10-25 years 26,463 13,436
Machinery and equipment 3-10 years 92,810 58,208
Construction in process 6,138 1,813
-------------- -------------
127,613 74,298
Less - accumulated depreciation 35,920 30,846
-------------- -------------
$ 91,693 43,452
============== =============
(7) Debt
(a) Short Term
At December 31, 2000, the Company had outstanding $2,000 of unsecured
notes payable to banks bearing interest at 7.29%. The notes were
repaid subsequent to December 31, 2000.
(Continued)
32
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(b) Long-Term
Long-term debt at December 31, 2000 and 1999 consists of the
following:
2000 1999
-------------- --------------
Borrowings under a revolving credit facility
bearing interest at variable rates (7.29%
at December 31, 2000) due July 25, 2003 $24,698 17,151
Borrowings under a Euro revolving credit facility bearing interest at
variable rates (6.63% at December 31, 2000) due
July 15, 2006 942 --
Euro term loans bearing interest at variable rates (6.63% at December
31, 2000) payable in quarterly installments of $1,885 beginning
April 15, 2002 through July 15, 2006 24,875 --
------- -------
Total long-term debt 50,515 17,151
Less current installments -- --
------- -------
Long-term debt, excluding current installments $50,515 17,151
======= =======
The Company has a revolving line of credit with AmSouth Bank under
which the Company can borrow up to $25,000. Outstanding borrowings
bear interest at the rate of LIBOR plus 0.65% or the Federal Funds
effective rate plus 1.5%, at the Company's option. The revolving
line of credit is unsecured and all outstanding amounts are due
July 25, 2003. In February 2001, the Company extended and restated
the revolving credit facility to increase the facility to $50,000.
The Company borrowed $23,000 under the facility to finance the
acquisition of Delta Rubber Company (see note 17). Amounts
outstanding under the amended revolving credit facility are
unsecured and bear interest at LIBOR plus an applicable margin of
between 0.65% and 2.15% based upon financial ratios. The line of
credit agreement contains restrictive covenants, which specify,
among other things, restrictions on the incurrence of indebtedness
and the maintenance of certain working capital requirements. The
Company was in compliance with such covenants at December 31, 2000.
(Continued)
33
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
In connection with the Euroball transaction (see note 2) the Company
and NN Euroball ApS, entered into a Facility Agreement with a bank
to provide up to Euro 36,000 ($33,941) in Term Loans and Euro 5,000
($4,714) in revolving credit loans. The Company borrowed Euro 30,500
($28,755) under the term loan facility and Euro 1,000 ($943) under
the revolving credit facility. Amounts outstanding under the
Facility Agreement are secured by inventory and accounts receivable
and bear interest at EURIBOR plus an applicable margin between 1.75%
and 2.25% based upon financial ratios. The shareholders of NN
Euroball Aps have provided guarantees for the Facility Agreement.
The Facility Agreement contains restrictive covenants, which
specify, among other things, restrictions on the incurrence of
indebtedness and the maintenance of certain financial ratios. The
Company was in compliance with such covenants at December 31, 2000.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2000 are as follows:
2001 $ --
2002 5,655
2003 32,237
2004 7,539
2005 4,142
Thereafter 942
-------------
$ 50,515
=============
Interest paid during 2000, 1999 and 1998 was $1,917, $519 and $64,
respectively.
(8) Employee Benefit Plans
The Company has two defined contribution 401(k) profit sharing plans
covering substantially all employees of the ball and roller and plastics
segments. The plan in place for the ball and roller segment covers 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 for the ball and roller division
plan were $106, $120 and $141 in 2000, 1999 and 1998.
The plan in place for the plastics segment covers all employees who have
completed six months of service and have elected to participate in the
plan. A participant may elect to contribute from 1% to 15% of his or her
compensation to the plan, subject to a maximum deferral set forth in the
Internal Revenue Code. The Company matches twenty-five percent of the
first six percent of each employee's contribution to the plan and provides
for a discretionary contribution at the end of each plan year. The
contributions by the Company for the plastics segment plan since
acquisition in July 1999 were $70 in 2000 and $196 in 1999.
(Continued)
34
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
The Company has a defined benefit pension plan covering its Eltman,
Germany facility employees (a Euroball division). The benefits are based
on the expected years of service including the rate of compensation
increase. The plan is unfunded.
Following is a summary of the changes in the projected benefit
obligation for the defined benefit pension plan during 2000:
2000
------------
Change in projected benefit obligation:
Benefit obligation at July 1, 2000 $ 1,886
Service cost 33
Interest cost 62
Actuarial loss 152
------------
Benefit obligation at end of the year $ 2,133
============
2000
-------------
Weighted-average assumptions as of December 31:
Discount rate 6.0%
Rate of compensation increase 2.0%
2000
-----------
Components of net periodic benefit cost:
Service cost $ 33
Interest cost on projected benefit obligation 62
-----------
Net periodic pension cost $ 95
===========
(9) Stock Incentive Plan
Effective March 2, 1994, the Company adopted the NN, Inc. Stock Incentive
Plan under which 1,125 shares of the Common Stock were reserved for
issuance to officers and key employees of the Company. During 1999, the
plan was amended to increase the number of shares available for issuance
pursuant to awards made under the plan from 1,125 to 1,625. 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.
(Continued)
35
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
A summary of the status of the Company's stock option plan as described
above as of December 31, 2000, 1999 and 1998, and changes during the years
ending on those dates is presented below:
2000 1999 1998
---------------------------------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- ----------------------------------- ---------- ------------
Outstanding at beginning of
year 1,049 $ 8.53 548 $ 11.53 461 $ 11.86
Granted 555 7.63 539 5.93 97 9.83
Exercised (2) 5.87 -- -- -- --
Forfeited (529) 10.95 (38) 12.28 (10) 10.44
---------- ----------- ----------
Outstanding at end of year 1,073 6.87 1,049 8.53 548 11.53
========== =========== ==========
Options exercisable at
year-end 290 6.09 345 11.53 246 11.75
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/2000 Life Price at 12/31/2000 Price
------------- ------------ ------------- -------------- ------------
$5.63 - 7.63 1,062 9.2 years $ 6.84 284 $ 5.98
$9.75 - 11.50 11 7.3 years $ 10.38 7 $ 10.77
(Continued)
36
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
On December 7, 1998 the Company granted a total of 20 options to the
members of its Board of Directors. These options carry an exercise price
equal to the market price on the date of issuance and vest equally over a
period of five years, beginning one year from date of grant. The maximum
term of these options is 10 years. On July 4, 1999 the Company granted an
additional 20 options to the members of its Board of Directors. These
options carry an exercise price equal to the market price on the date of
issuance and vest six months from the date of grant. The maximum term of
these options is 10 years.
On August 4, 1998 the Company's Board of Directors authorized the
repurchase of up to 740 shares of its Common Stock, equaling 5% of the
Company's issued and outstanding shares as of August 4, 1998. The program
may be extended or discontinued at any time, and there is no assurance that
the Company will purchase any or all of the full amount authorized. The
Company has not repurchased any shares under this program through December
31, 2000.
All options granted in the period January 1, 2000 through December 31,
2000, except those granted to the Company's Board of Directors as described
above, vest ratably over periods ranging from six months to five years,
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. All options granted in the period
January 1, 1995 through December 31, 1998, except those granted to the
Company's Board of Directors as described above, 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. Certain options granted in July, 1999
were deemed to be repriced options under the applicable accounting
requirements. These options which were fully vested as of the effective
date of FIN 44 are treated under variable accounting. Accordingly,
compensation expense will be recognized to the extent the market price of
the Company's stock exceeds $10.50 compensation expense will be recognized.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
SFAS 123 encourages but does not require a fair value based method of
accounting for stock compensation plans. the Company has elected to
continue accounting for its stock compensation plan using the intrinsic
value based method and, accordingly, has not recorded compensation expense
for each of the three years ended December 31, 2000. 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 proforma amounts indicated below:
Year ended December 31,
2000 1999 1998
--------------------------------------
Net income As reported (000's) $ 9,987 7,759 7,656
Proforma (000's) 9,649 7,462 7,360
Earnings per share As reported $ 0.66 0.52 0.52
Proforma 0.63 0.50 0.50
Earnings per
share-assuming As reported $ 0.64 0.52 0.52
dilution Proforma 0.62 0.50 0.50
(Continued)
37
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
The fair value of each option grant was estimated on actual information
available through December 31, 2000, 1999 and 1998 using the Black Scholes
option-pricing model with the following assumptions:
Term One year after each vesting date Risk
free interest rate 5.1%, 6.5% and 4.7% for 2000, 1999 and 1998,
Respectively
Dividend yield 3.65%, 4.4% and 5.4% annually for 2000, 1999
and 1998, respectively
Volatility 28%, 39% and 32% for 2000, 1999 and 1998,
Respectively
(10) Segment Information
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective with its
December 31, 1998 reporting and identified its reportable segments based
upon the geographic location of its business units. During 2000, the
Company's reportable segments are based on differences in product lines
and geographic locations and are divided between balls and rollers,
Euroball and plastics. The ball and roller segment comprises three
manufacturing facilities in the eastern United States. The Euroball
segment acquired in July 2000, comprises manufacturing facilities located
in Kilkenny, Ireland, Eltmann, Germany and Pinerolo, Italy. All of the
facilities in the ball and roller and Euroball segments are engaged in the
production of precision balls and rollers used primarily in the bearing
industry. The plastics segment is concentrated in one facility located in
Lubbock, Texas which represents the IMC business acquired in July 1999.
This facility is engaged in the production of plastic injection molded
products for the bearing, automotive, instrumentation, fiber optic and
consumer hardware markets.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
segment performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses. The Company accounts
for intersegment sales and transfers at current market prices; however,
the Company did not have any material intersegment transactions during
2000, 1999 or 1998.
December 31, December 31, December 31,
2000 1999 1998
--------------------------------- ---------------------- ----------------------
Balls and Balls and Balls and
Rollers Euroball Plastics Rollers Plastics Rollers Plastics
---------- ---------- ----------- ----------- ---------- ---------- -----------
Net sales $ 67,637 33,988 30,504 67,736 17,558 73,006 --
Interest expense 385 622 766 -- 523 64 --
Depreciation and
amortization 4,796 2,123 2,246 4,932 1,199 4,557 --
Segment profit 8,314 775 898 11,109 710 12,136 --
Segment assets 62,574 91,392 33,842 58,557 31,811 66,860 --
Expenditures for long-
lived assets 9,319 3,737 4,854 1,723 671 5,758 --
(Continued)
38
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Sales to external customers and long-lived assets utilized by the Company
were concentrated in the following geographical regions:
December 31, December 31, December 31,
2000 1999 1998
-------------------------- ------------------------ -------------------------
Long-lived Long-lived Long-lived
Sales assets Sales assets Sales assets
----------- -------------- --------- -------------- ------------ ------------
United States $ 62,094 44,137 52,907 36,842 39,331 30,723
Europe 46,697 46,216 21,064 6,610 23,843 7,566
Canada 6,449 -- 5,918 -- 4,163 --
Latin/South America 6,100 1,340 2,903 -- 2,762 --
Other export 10,789 -- 2,502 -- 2,907 --
----------- -------------- --------- -------------- ------------ ------------
Total $ 132,129 91,693 85,294 43,452 73,006 38,289
=========== ============== ========== ============= ============ ============
Two customers comprised 49%, 46% and 48% of ball and roller sales during
the years ended December 31, 2000, 1999, and 1998, respectively. One
customer comprised 20% and 35% of plastics sales for the years ended
December 31, 2000 and 1999, respectively. The Company has a supply
agreement at prevailing market prices with the major plastics customer to
be the exclusive supplier of all manufactured product sold by the
customer. This supply agreement is effective through October 31, 2004.
(11) Income Taxes
Income tax expense attributable to income from continuing operations
consists of:
Year ended December 31,
2000 1999 1998
----------- ------------ -------------
Current
U.S. Federal $ 3,496 3,960 3,899
State 452 469 432
Non-U.S. 826 -- --
------------- -------------- ---------
4,774 4,429 4,331
------------- -------------- ---------
(Continued)
39
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Year ended December 31,
2000 1999 1998
----------- ------------ -------------
Deferred
U.S. Federal 496 (335) 115
State 63 (34) 34
Non-U.S. 626 -- --
------------- -------------- ---------
Total deferred expense 1,185 (369) 149
------------- -------------- ---------
$ 5,959 4,060 4,480
============= ============== =========
A reconciliation of taxes based on the U.S. federal statutory rate of 34%,
34% and 35% for the years ended December 31, 2000, 1999 and 1998,
respectively, is summarized as follows:
Year ended December 31,
2000 1999 1998
---------- ------------- ------------
Income taxes at the federal statutory rate $ 5,646 4,006 4,247
State income taxes, net of federal benefit 340 289 309
Foreign sales corporation benefit, net of
liability (183) (256) (312)
Non-US earnings taxed at different rates 337 (182) 44
Other, net (181) 203 192
---------- ------------- ------------
$ 5,959 4,060 4,480
========== ============= ============
The tax effects of the temporary differences are as follows:
Year ended December 31,
2000 1999
------------- ------------
Deferred income tax liability
Tax in excess of book depreciation $ 5,050 3,565
Duty drawback receivable 69 161
Goodwill 210 41
Other deferred tax liabilities 123 --
------------- ------------
Gross deferred income tax liability 5,452 3,767
------------- ------------
Deferred income tax assets
Inventories 182 406
Allowance for bad debts 279 332
Vacation accrual 287 216
Health insurance accrual 83 122
Other working capital accruals 230 80
------------- ------------
Gross deferred income tax assets 1,061 1,156
------------- ------------
Net deferred income tax liability $ 4,391 2,611
============= ============
(Continued)
40
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Deferred income tax expense differs from the change in the net deferred
income tax liability due to the following:
2000
-------------
Change in net deferred income tax liability $ 1,780
Acquisition of deferred tax liability recorded
under purchase accounting (595)
-------------
Deferred income tax expense $ 1,185
=============
Although realization of deferred tax assets is not assured, management
believes that it is more likely than not that all of the deferred tax
assets will be realized. However, the amount of the deferred tax assets
considered realizable could be reduced based on changing conditions.
The Company has not recognized a deferred tax liability for the
undistributed earnings of its non-U.S. subsidiaries and non-U.S. corporate
joint ventures. The Company expects to reinvest these undistributed
earnings indefinitely and does not expect such earnings to become subject
to U.S. taxation in the foreseeable future. A deferred tax liability will
be recognized when the Company expects that it will recover these
undistributed earnings in a taxable manner, such as through the receipt of
dividends or sale of the investments. It is not practicable to determine
the U.S. income tax liability, if any, that would be payable if such
earnings were not reinvested indefinitely.
Income tax payments were approximately $5,207, $3,123 and $3,052 in 2000,
1999, 1998, respectively.
(12) Reconciliation of Net Income Per Share
Years ended December 31,
2000 1999 1998
------------ ------------- -------------
Net income $ 9,987 7,759 7,656
Weighted average shares outstanding 15,247 15,021 14,804
Effective of dilutive stock options 284 17 --
------------- ------------ -------------
Dilutive shares outstanding 15,531 15,038 14,804
Basic net income per share $ 0.66 0.52 0.52
Diluted net income per share $ 0.64 0.52 0.52
Excluded from the shares outstanding for the years ended December 31, 2000
and 1999 were 10 and 525 antidilutive options, respectively, which had
exercise prices ranging from $9.75 to $11.50 and $6.38 to $15.50,
respectively.
(Continued)
41
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
The Company has declared a dividend of $0.32 per share in each of the
years ending December 31, 2000, 1999 and 1998.
(13) Commitments
The Company has operating lease commitments for machinery and office
equipment, which expire on varying dates. Rent expense for 2000, 1999, and
1998 was $767, $376 and $370, respectively. The following is a schedule by
year of future minimum lease payments as of December 31, 2000 under
operating leases that have initial or remaining noncancelable lease terms
in excess of one year.
Year ended
December 31,
-----------------
2001 $ 1,253
2002 1,194
2003 1,055
2004 914
2005 913
Thereafter 14
-----------
Total minimum lease payments $ 5,343
===========
(14) Quarterly Results of Operations (Unaudited):
The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 2000 and 1999.
Year ended December 31, 2000
March 31 June 30 Sept. 30 Dec. 31
-------------- ----------- ----------- -----------
Net sales $ 28,002 25,643 37,075 41,409
Gross profit 7,656 7,678 10,972 11,898
Net income 2,110 2,242 2,443 3,192
Basic net income per share 0.14 0.15 0.16 0.21
Dilutive net income per share 0.14 0.15 0.16 0.21
Weighted average shares outstanding:
Basic number of shares 15,244 15,244 15,245 15,247
Effect of dilutive stock options 214 192 179 235
--------------- ----------- ----------- ----------
Diluted number of shares 15,458 15,436 15,424 15,482
=============== ============ ========== ==========
(Continued)
42
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Year ended December 31, 1999
March 31 June 30 Sept. 30 Dec. 31
--------------- --------- ------------ ------------
Net sales $ 17,912 17,475 25,601 24,306
Gross profit 5,389 4,884 7,312 7,742
Net income 1,962 1,715 1,944 2,138
Basic net income per share 0.13 0.12 0.13 .14
Dilutive net income per share 0.13 0.12 0.13 .14
Weighed average shares outstanding;
Basic number of shares 14,804 14,804 15,244 15,244
Effect of dilutive stock options -- 4 73 66
--------------- ----------- ----------- ----------
Diluted number of shares 14,804 14,808 15,317 15,310
=============== =========== =========== ===========
(Continued)
43
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(15) Fair Value of Financial Instruments
Management believes the fair value of financial instruments approximate
their carrying value due to the short maturity of these instruments or in
the case of the Company's debt, due to the variable interest rates. The
following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2000 and 1999:
2000 1999
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- -------------- -----------
Financial assets:
Cash and cash equivalents $ 8,273 8,273 1,409 1,409
Accounts receivable, net 29,549 29,549 18,183 18,183
Other current assets 1,512 1,512 688 688
Other non-current assets 6,712 6,712 735 735
Financial liabilities:
Accounts payable and bank
overdraft 17,337 17,337 5,343 5,343
Accrued expenses and other
payables 9,708 9,708 5,135 5,135
Short-term loan 2,000 2,000 -- --
Long-term debt 52,515 52,515 17,151 17,151
(Continued)
44
NN, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(In thousands, except per share data)
(16) Fire
On March 12, 2000, a fire damaged a portion of the Company's manufacturing
plant in Erwin, Tennessee. The fire was contained to approximately
30% of the productions area and did not result in serious injury to any
employee. Effected production was shifted to the Company's other
facilities as possible as well as the use of other suppliers to protect
product supply to customers. Insurance coverage for the loss provides for
reimbursement of the replacement value of property and equipment damaged
in the fire. At December 31, 2000 the Company is in the process of
settling the insurance claim. For the year ended December 31, 2000, the
net gain on involuntary conversion of $728 represents insurance proceeds
received in excess of costs incurred to date.
(17) Subsequent Event
On February 16, 2001, the Company completed the acquisition of all of the
outstanding stock of The Delta Rubber Company, a Connecticut
corporation ("Delta"). Delta provides high quality engineered bearing
seals and other precision-molded rubber products to original equipment
manufacturers. NN plans to continue the operation of the Delta business,
which consists of one manufacturing facility located in Danielson,
Connecticut.
NN acquired Delta by purchasing the outstanding stock from Delta's
shareholders for $22,500 in cash, of which $500 is to be held in escrow
for one year from the date of closing. The purchase price was based on
Delta' existing base, financial performance and the expectation that
Delta's products and customers will compliment the Company's existing
businesses.
(18) Related Party Transactions
The minority shareholders of NN Euroball ApS, SKF and FAG, are significant
customers of the Company. For the year ended December 31, 2000, sales to
SKF and FAG amounted to $64,064. At December 31, 2000, accounts receivable
from SKF and FAG amounted to $4,983.
In connection with the Euroball transaction described in note 2, SKF and
FAG provided administrative services to NN Euroball ApS. Charges for these
services amounted to approximately $1,150 from the transaction date to
December 31, 2000. At December 31, 2000, amounts payable to SKF and FAG
amounted to $1,762.
45
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 27, 2000, the Company retained the services of KPMG LLP as
its principle accountants to audit the Company's consolidated financial
statements, replacing PricewaterhouseCoopers LLP. The decision to retain KPMG
LLP was based upon a reevaluation by the Company of its current professional
relationships and was approved by the Company's Board of Directors at the
recommendation of the Company's Audit Committee.
During the Company's two most recent fiscal years and through November
27, 2000, there have been no disagreements with PricewaterhouseCoopers LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. PricewaterhouseCoopers LLP reports
on the financial statements of the Company for the past two years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
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, 2000, in accordance with General
Instruction G to Form 10-K, is hereby incorporated herein by reference.
Executive Officers. Information required by Item 401 of Regulation S-K
concerning the Company's executive officers is set forth in Item 1 hereof under
the caption "Executive Officers of the Registrant."
Compliance with Section 16(a) of the Securities Exchange Act. The
information required by Item 405 of Regulation S-K concerning compliance with
Section 16(a) of the Securities Exchange Act by the Company's directors and
executive officers and any 10% beneficial owners is contained in the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's definitive Proxy Statement and, in accordance with General Instruction
G to Form 10-K, is hereby incorporated herein by reference.
Item 11 Executive Compensation
The information required by Item 402 of Regulation S-K is contained in
the sections entitled "Election of Directors -- Compensation of Directors" and
"Executive Compensation" of the Company's definitive Proxy Statement and, in
accordance with General Instruction G to Form 10-K, is hereby incorporated
herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K is contained in
the section entitled "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement and, in accordance with General Instruction G to Form
10-K, is hereby incorporated herein by reference.
Item 13 Related Party Relationships
The information required by Item 404 of Regulation S-K is contained in
the section entitled "Compensation Committee Interlocks and Insider
Participation" of the Company's definitive Proxy Statement and, in accordance
with General Instruction G to Form 10-K, is hereby incorporated herein by
reference.
46
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 for the year ended December 31, 2000 20
Report of Independent Accountants for the year ended December 31, 1999 and
December 31, 1998 21
Balance Sheets at December 31, 2000 and 1999 22
Statements of Income and Comprehensive Income for the Three Years ended
December 31, 2000. 23
Statements of Changes in Stockholders' Equity for the Three Years
Ended December 31, 2000 24
Statements of Cash Flows for the Three Years Ended December 31, 2000 25
Notes to Financial Statements 26
(a)2. 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).
10.3* $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).
10.5 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).
47
10.6 Stockholder Agreement, dated February 22, 1994, among certain
stockholders of the Company (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 - File No.
33-74694).
10.7 Form of Indemnification Agreement for officers and directors of the
Company (incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 - File No. 33-74694).
10.8 Lease, dated as of September 5, 1995, between the Company and the
State of Tennessee Department of Economic and Community Development
and the County of Johnson County, Tennessee (incorporated by
reference to Exhibit 10.9 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.9 Lease, dated as of March 22, 1996, between the Company and the State
of Tennessee Department of Economic and Community Development and
the County of Johnson County, Tennessee (incorporated by reference
to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.10* Stock Option Agreement, dated as of July 3, 1995, between the
Company and Roderick R. Baty (incorporated by reference to Exhibit
10.11 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.11 Loan Agreement, dated as of July 25, 1997, between the Company and
First American National Bank (incorporated by reference to Exhibit
10.13 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
10.12* Employment Agreement, dated August 1, 1997, between the Company and
Roderick R. Baty (incorporated by reference to Exhibit 10.14 of the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997).
10.13* Employment Agreement, dated May 7, 1998, between the Company and
Frank T. Gentry.
10.14* Form of Stock Option Agreement, dated December 7, 1998, between the
Company and the non-employee directors of the Company (incorporated
by reference to Exhibit 10.15 of the Company's Quarterly Report on
Form 10-K for the fiscal year ended December 31, 1999).
10.15* Elective Deferred Compensation Plan, dated February 26, 1999
(incorporated by reference to Exhibit 10.16 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
23.2 Consent of KPMG LLP (filed herewith).
- --------------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 16, 2000 which included
further details of the transaction entered into with FAG
Kugelfischer Georg Schafer AG and AB SKF to form a new Danish
holding company, NN Euroball ApS.
The Company filed a Form 8-K on November 3, 2000 announcing its
third quarter 2000 results.
The Company filed a Form 8-K on December 4, 2000 announcing that the
Company had retained the services of KPMG LLP replacing
PricewaterhouseCoopers LLP as independent auditors.
(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.
(Continued)
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /S/ RICHARD D. ENNEN
Richard D. Ennen
Chairman and Director
Dated: March 29, 2001
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 and Director March 29, 2001
- -----------------------------------------
Richard D. Ennen
/S/ RODERICK R. BATY President, Chief Executive March 29, 2001
- ----------------------------------------- Officer and Director
Roderick R. Baty (Principal Executive Officer)
/S/ WILLIAM C. KELLY, JR. Treasurer, Secretary and Chief March 29, 2001
- ----------------------------------------- Accounting Officer (Principle
William C. Kelly, Jr. Accounting Officer)
/S/ DAVID L. DYCKMAN Vice President - Business March 29, 2001
- ----------------------------------------- Development and Chief
David L. Dyckman Financial Officer (Principal
Financial Officer)
/S/ MICHAEL D. HUFF Director March 29, 2001
- -----------------------------------------
Michael D. Huff
/S/ G. RONALD MORRIS Director March 29, 2001
- -----------------------------------------
G. Ronald Morris
/S/ MICHAEL E. WERNER Director March 29, 2001
- -----------------------------------------
Michael E. Werner
/S/ STEVEN T. WARSHAW Director March 29, 2001
- -----------------------------------------
Steven T. Warshaw
/S/ JAMES L. EARSLEY Director March 29, 2001
- -----------------------------------------
James L. Earsley
49
Index to Exhibits
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
50