UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 29, 2001
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from .................. to ....................
Commission file Number 0-22053
GENERAL BEARING CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-2796245
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
44 High Street, West Nyack, New York 10994
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
At April 8, 2002 the aggregate market value of the Registrant's outstanding
common stock, $.01 par value per share, held by non-affiliates, was $4,835,000,
based on the closing sale price as reported April 8, 2002 on the NASDAQ Small
Cap Market.
At April 8, 2002, the Registrant had issued 7,088,950 shares of common stock,
$.01 par value per share, and had outstanding 4,048,680 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None of the documents indicated on Form 10-K have been incorporated herein by
reference.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements, which are statements other than those of
historical fact, including, without limitation, ones identified by the use of
the words: "anticipates," "believes", "estimates," "expects," "intends,"
"plans," "predicts," and similar expressions. In this Annual Report such
statements may relate to the recoverability of deferred taxes, likely industry
trends, the continued availability of credit lines, the suitability of
facilities, access to suppliers and implementation of joint ventures and
marketing programs. Such forward looking statements involve important risks and
uncertainties that could cause actual results to differ materially from those
expected by the Company, and such statements should be read along with the
cautionary statements accompanying them and mindful of the following additional
risks and uncertainties possibly affecting the Company: the possibility of a
general economic downturn, which is likely to have an important impact on
historically cyclical industries such as manufacturing; significant price,
quality or marketing efforts from domestic or overseas competitors; the loss of,
or substantial reduction in, orders from a major customer; the loss of, or
failure to attain, additional quality certifications; changes in U.S. or foreign
government regulations and policies, including the imposition of antidumping
orders on the Company or any of its suppliers; a significant judgment or order
against the Company in a legal or administrative proceeding; and potential
delays in implementing planned sales and marketing expansion efforts and the
failure of their effectiveness upon implementation.
GENERAL BEARING CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
TABLE OF CONTENTS
No. Page
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PART I
Items 1 & 2. Business and Properties............................................................. 1
Item 3. Legal Proceedings................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................................. 7
Item 6. Selected Financial Data............................................................. 8
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................................. 9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk........................... 14
Item 8. Financial Statements and Supplementary Data......................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 47
Item 11. Executive Compensation.............................................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 51
Item 13. Certain Relationships and Related Transactions...................................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 54
PART I
Items 1 and 2. Business and Properties.
General Bearing Corporation ("General") and subsidiaries (collectively,
"the Company") is actively engaged in two business segments: bearings and
machine tools. Net sales, gross profit and operating income attributable to each
segment of the Company for each of the last three years are set forth in Note 16
to the Company's consolidated financial statements for the year ended December
29, 2001.
BEARINGS:
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The Company manufactures and distributes a variety of bearings and bearing
components under the Hyatt(R) and The General(R) trademarks. The Company
supplies original equipment manufacturers ("OEMs") and distributors. The
Company's products, sold principally in the United States ("U.S."), are used in
a broad range of applications, including automobiles, railroad cars,
locomotives, trucks, heavy duty trailers, office equipment, machinery and
appliances.
The Company strives to be a reliable and cost effective provider of
bearings and bearing components. The Company's strategy includes the following:
* PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE.
General maintains a detailed and extensive Quality Assurance Program. It has
been certified to the M1003 standard by the Association of American Railroads
("AAR"); has been granted "Unconditional Approval" from the AAR for its tapered
journal bearings; maintains ISO 9001 registration from the International
Standards Organization ("ISO"); and maintains QS-9000 registration from the
Automotive Industry Quality System. General also requires that its suppliers
conform to Company and customer quality and engineering standards. Certain of
the Company's joint ventures have also achieved QS-9000 and/or ISO
certifications.
* PRESENCE IN CHINA. In 1987, General formed Shanghai General
Bearing Co., Ltd. ("SGBC"), a joint venture in the People's Republic of China
("PRC") to establish a low cost, quality controlled source for bearings and
bearing components. The Company has established other manufacturing joint
ventures in the PRC, and it continues to investigate further expansion
opportunities. On February 3, 1997, the U.S. Department of Commerce ("Commerce")
granted SGBC partial revocation of the antidumping order affecting tapered
roller bearings from the PRC. As a result, SGBC and the Company are no longer
required to participate in the annual reviews of the antidumping order conducted
by Commerce. The Company believes SGBC's revocation provides it with a
competitive advantage. Any disruption in the supply of bearings and bearing
components from the PRC could have a material adverse effect on the Company's
business.
1
PRODUCTS
The Company manufactures and markets high quality, precision ball and
roller bearings used in a broad range of applications including automotive and
trucking, rail car and locomotive, appliances, lawn and garden implements,
office equipment, consumer products, medical equipment, material handling, and
power tools.
The Company sells approximately 2,500 stock keeping units ("SKU's"). The
Company's product line includes ball and roller bearings and their components.
The Company offers its products in standard, modified, and custom designs where
appropriate. Under The General(R) trademark, the Company produces ball bearings
for a wide variety of products including copying machines, automotive steering
columns, postal equipment and wheelchairs. Under the Hyatt(R) brand, the Company
produces select tapered roller bearings (TRB's), tapered journal bearings,
spherical roller bearings and cylindrical roller bearings which are used in
railroad, truck/trailer, automotive and other industrial applications.
MANUFACTURING
The Company primarily manufactures and assembles bearings at its
facilities in New York and the PRC including SGBC in Shanghai and Ningbo General
Bearing Co., Ltd. ("NGBC") in Yuyao City.
The Company obtains 76% of its bearing and component requirements from its
manufacturing plants in the PRC, discussed in greater detail below. The Company
maintains relationships with unaffiliated manufacturers to produce the remainder
of its requirements. The Company has no long-term contracts with its
unaffiliated manufacturing sources. The Company attempts to maintain sourcing
flexibility by not engaging in any purchasing contracts that exceed one year.
CHINESE MANUFACTURING
General has entered into six joint ventures with manufacturers in the PRC
to enable it to manufacture high quality, low cost bearings and bearing
components. By entering into joint ventures, rather than long-term manufacturing
contracts, General is better able to monitor and control production and quality
assurance by having access to the factories at both management and production
levels. Further, by manufacturing at joint ventures, General may not be required
to incur inventory carrying costs, since the joint ventures may hold all
inventory until needed by General.
SGBC, a joint venture formed with Shanghai Roller Bearing Factory ("SRBF")
was established in June 1987. SGBC produces tapered roller bearings, which
General imports into the U.S. for further assembly, inspection, testing and
distribution. General contributed 25% of the initial capital of SGBC in the form
of capital equipment valued by the parties at $750,000 and General's joint
venture partner, SRBF, contributed 75% of the initial capital of SGBC in the
form of facilities and equipment, valued by the parties at $1,500,000 and
$750,000, respectively. In November 2001, General and SRBF agreed to a new joint
venture contract whereby ownership would be shared equally with General assuming
control of operations. The official business license for the revised joint
venture company was granted in February 2002.
2
General has the exclusive right to sell the products of SGBC in the U.S.
In 2001, 2000 and 1999, General purchased $5.8 million, $12.4 million and $10.5
million respectively, in bearings and bearing components from SGBC. Purchases
are made upon terms and conditions established periodically by negotiation
between General and SGBC.
NGBC, a joint venture with China Ningbo Genda Bearing Company, Ltd., was
established in 1998. Located in Yuyao City, China, this venture manufactures
ball and roller bearings and their components. Initially, the venture's
production was directed at electric motor bearings. In its second stage,
production has been directed toward product for sale by General to the U.S.
automotive industry. General's initial contribution was $1.0 million; 33.3% of
the registered capital. During 2000, General increased its ownership to 42% and
in 2001, to 50% and assumed control over operations. General purchased $3.9
million, $10.4 million and $8.1 million from NGBC in 2001, 2000 and 1999,
respectively.
Shanghai Pudong General Bearing Company ("SPGBC"), a joint venture with
Shanghai Xiua Industrial Corporation was established in 1996. Located in the
Pudong Industrial Zone of Shanghai, this venture produces ball bearings for sale
in the U.S. by General. General contributed $150,000; 25% of the registered
capital of SPGBC, in 1998. In 2001, 2000 and 1999, General purchased $1.6
million, $1.2 million and $1.7 million from SPGBC, respectively.
Jiangsu General Ball & Roller Company, Ltd. ("JGBR"), a joint venture with
Jiangsu Lixing Steel Ball Factory (Group) ("JSBF"), was established in 1999.
Located in Rugao City, China, this venture is comprised of the operations of
JSBF, a manufacturer of rolling elements for bearings. In March 2000, General
formed NN General, LLC ("NNG"), a joint venture with NN Ball & Roller, Inc.
("NN"). General and NN each held a 50% interest in NNG, which holds a 60%
interest in JGBR. General invested net cash for these transactions of $100,000
in 2000. Also in 2000, General advanced $2,440,000 to NNG, which invested a
total of $4.8 million in JGBR. In December 2001, General purchased NN's 50%
interest in NNG.
Wafangdian General Bearing Co., Ltd. ("WGBC"), a joint venture with
Wafangdian Bearing Company, produces components for spherical roller bearings
and railroad bearings in the PRC. General sells the WGBC bearings in the U.S. In
its second stage, it is anticipated that WGBC will produce rear wheel automotive
bearings. Rockland paid $2.1 million, $1.9 million and $2.6 million for
consignment purchases from WGBC in 2001, 2000 and 1999, respectively.
Rockland Manufacturing Company, ("Rockland") a joint venture with
Wafangdian USA Ltd., was established in 1993 and exists at General's West Nyack
facility. Rockland offers flexibility to General by providing readily accessible
inventory, which General pays for at the time it is needed to fill customer
orders.
SALES, MARKETING AND CUSTOMERS
The Company markets its products principally in the U.S. through 11
salaried sales employees and 29 commissioned independent sales representative
organizations, aggregating 96 sales persons. In addition, the Company has 10
customer service representatives responsible for handling orders and providing
sales support. Products bear The General(R) label for ball bearings and the
Hyatt(R) brand for all types of roller bearings.
The Company's OEM focus is on electric motor manufacturers and the
transportation industry; e.g., truck/trailer manufacturers, railroad locomotive
and freight car manufacturers, and automotive manufacturers. Beyond the
transportation industry, the Company supplies precision ball bearings to
manufacturers of office equipment, machinery and appliances. Distributors
include customers ranging in size from the two largest industrial distributors
in the U.S., each of which has more than 400 outlets, to independent single
outlet operations. In 2001, 2000 and 1999, sales to Visteon represented more
than 10% of the Company's total net sales.
Shipments to OEMs can be within one to 365 days from the date an order is
placed. Actual shipments are dependent upon production schedules of the
Company's customers. Product is generally shipped to distributors within 24
hours of the time an order is placed. The Company's arrangements with its
customers typically provide that payments are due within 30 days following the
date of shipment of goods.
3
EMPLOYEES
The Company's bearing operations have 889 full-time employees, of whom 788
were engaged in production, shipping and receiving, quality control, and
maintenance, and 36 of whom were engaged in sales and marketing. The balance of
the Company's full-time employees is primarily administration. 68 of the
Company's employees engaged in production, shipping and receiving, quality
control and maintenance are subject to collective bargaining and are represented
by the United Brotherhood of Carpenters and Joiners of America, AFL-CIO, Local
3127 ("Union"). The current collective bargaining agreement with the Union
expires on April 30, 2003. The Company believes that relations with its
employees, including those subject to collective bargaining, are good. General
has a 22 year relationship with the Union and has never experienced a Union work
stoppage.
COMPETITION
The ball and roller bearing industry is highly competitive. The Company
believes that competition within the precision ball and roller bearing market is
based principally on quality, price and the ability to meet customer delivery
requirements. The Company's primary domestic and foreign competitors are Timken,
SKF USA Inc., NSK Corporation, American Koyo Corp., NTN Bearing Corporation of
America, the Torrington Company and FAG Holding Corporation. Management believes
that the Company's manufacturing and sourcing capabilities and its reputation
for consistent quality and reliability have positioned the Company for continued
growth.
PATENTS, TRADEMARKS AND LICENSES
Except for The General(R) trademark and the Hyatt(R) trademark, the
Company does not own any U.S. or foreign patents, trademarks or licenses that
are material to its business. The Company does rely on certain data, including
costing and customer lists, and the success of its business depends, to some
extent, on such information remaining confidential. Each employee who may have
access to confidential information is subject to a confidentiality agreement.
During 2001, the Company purchased the Hyatt(R) trademark from an
affiliate of General Motors ("GM"). Prior to this, the Company's use of the
Hyatt(R) trademark was pursuant to a license from GM. Under the Hyatt License,
the Company had the right to use the terms "Hyatt," "Hyatt Railway," "Hyatt
Railway Products," "Hyatt Manufacturing," "Hyatt General" and various
derivatives of "Hyatt" in connection with locomotive journal boxes, traction
motor bearings, component parts thereof, and other products. The Company paid
licensing fees to GM of $0, $35,000 and $35,000 in 2001, 2000 and 1999,
respectively.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to federal, state and local
regulatory requirements relating to pollution control and protection of the
environment. Based on information compiled to date, management believes that the
Company's current operations materially comply with applicable environmental
laws and regulations. See Legal Proceedings.
4
PROPERTIES
The Company leases a facility located in West Nyack, New York, which has
approximately 190,000 square feet of floor space. Management believes that the
plant is adequate for the Company's present needs and anticipated expansion. The
West Nyack facility, which is used principally for administrative, assembly,
manufacturing, and distribution purposes, is owned by Gussack Realty Company
("Realty"). On November 1, 1996, the Company and Realty entered into a lease for
the West Nyack facility ("Lease"), which provides for an initial term expiring
on October 31, 2003, and is renewable at the option of the Company for an
additional six year term. The lease specifies a base rent of $4.81 per square
foot (or $913,000) annually, payable in monthly rent payments of $76,000. The
Lease provides for an increase in rent every other year, commencing in 1998,
equal to the greater of (i) 106% of the preceding year's rent or (ii) the
preceding year's rent multiplied by a fraction, the numerator of which is the
Consumer Price Index for the area including Rockland County or, if no such index
is published, for Northern Jersey ("CPI") in effect 90 days prior to November 1
of the new rent year, and the denominator of which is the CPI in effect 90 days
prior to November 1 of the preceding year. The November 1998 increase amounted
to 6% of the preceding year, resulting in rent of $5.0986 per square foot (or
$968,000) annually effective through October 31, 2000. The November 2000
increase also amounted to 6% of the preceding year, resulting in rent of $5.4045
per square foot (or $1,026,000) annually effective through October 31, 2002. See
"Item 13 - Certain Relationships and Related Transactions."
MACHINE TOOLS:
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The Company's machine tool operations are conducted through three
companies, World Machinery Group, BV ("WMG"), World Machinery Works, S.A. ("W.M.
Works") and WMW Machinery Company, Inc. ("WMW"), all direct or indirect
subsidiaries of World Machinery Company, Inc ("World"), which became a wholly
owned subsidiary of General in July 2000.
WMG, a 60% owned subsidiary, owns 51% of W.M. Works, a Romanian machine
tool manufacturer, which was privatized by the Romanian government in 1998. The
Company contributed $1.5 million of the $2.5 million that WMG paid for the 51%
interest in W.M. Works and, under the share sale contract with the Romanian
government, is obligated to invest an additional $5.2 million in W.M. Works in
cash or in kind, over the four year period ending December 31, 2002. WMG has the
exclusive right to market the primary products of W.M. Works outside of Romania,
with some minor exceptions.
PRODUCTS
W.M. Works, formerly known as Masini Unelte, Bacau, S.A., a Romanian
corporation, produces a variety of machine tools used for boring, turning,
milling and grinding metal work pieces. W.M. Works' product lines include
horizontal boring mills, bridge and gantry mills, vertical turning lathes, heavy
duty lathes, roll grinders, belt grinders and vertical grinders.
WMW, a wholly owned subsidiary, is the sole sales agent in North America
for most of the machine tool products manufactured by W.M. Works. WMW also
markets its own product lines of WMW HECKERT production milling machines and WMW
Radial Drills of 2" to 8" capacity, manufactured by independent suppliers
abroad. In addition, WMW imports and distributes CETOS grinding machines from
the Czech Republic.
SALES, MARKETING AND CUSTOMERS
The majority of W.M. Works export sales are made through WMG, which
utilizes independent regional sales agencies in each sales territory. WMG
presently has approximately 8 sales agencies with exclusive distribution rights
in North America, Germany, Sweden, Norway, India, Poland, the former Soviet
states and Argentina. WMG also markets through approximately 15 non-exclusive
agents covering Italy, China, Finland, Turkey, Greece, Austria, Egypt, the
United Kingdom, the Czech Republic, Belgium, Holland, Brazil, South Africa,
Pakistan, Vietnam and Taiwan.
WMW sells primarily in North America through approximately 150 independent
machine tool dealers on a non-exclusive basis.
5
WMW and W.M. Works regularly participate in trade shows such as the
International Machine Tool Show in Chicago and METAV in Dusseldorf, Germany and
advertise in trade publications such as Modern Machine Shop and American
Machinist in the United States and Werkstatt und Betrieb in Germany.
The machine tools produced by W.M. Works and WMW are sold to a wide
spectrum of customers, from large corporations, to small job shops. W.M. Works
also produces the mechanical components of machines for certain machine tool
producers in Germany, who complete the machines and sell them under their own
labels.
No individual customers of W.M. Works and WMW represented 10% or more of
the Company's sales in 2001, 2000 and 1999.
EMPLOYEES
The Company's machine tool operations have 488 employees, of whom 401 are
in production, 14 are sales personnel, 7 are in-house technical engineers (both
mechanical and electrical) and technicians, 50 are in design and the balance are
administrative.
COMPETITION
The machine tool industry is highly competitive. The principal competitors
of W.M. Works and WMW are Tos Varnsdorf (Czech Republic), Union
Werkzeugmaschinen (Germany), Defum (Poland), Mitsubishi (Japan), Giddings &
Lewis (USA), Juristi (Spain) Toshiba (Japan), Dorris-Schamann (Germany), Phoenix
(USA), Karnaghi (Italy), Waldrich (Germany), Hercules (Germany), Cetos (Czech
Rep.) and Landis (USA).
PATENTS, TRADEMARKS AND LICENSES
Except for the WMW(R) and WMW Heckert(R) trademarks owned by WMW in the
United States, neither WMW, W.M. Works nor WMG own any U.S. or foreign patents,
trademarks or licenses that are material to their businesses.
ENVIRONMENTAL COMPLIANCE
WMW and W.M. Works's operations are subject to governmental regulatory
requirements relating to pollution control and protection of the environment.
Based on information compiled to date, management believes that all current
machine tool operations materially comply with applicable environmental laws and
regulations.
PROPERTIES
W.M. Works owns and manufactures at a facility of approximately 680,000
sq. ft. in Bacau, Romania. Management believes the plant is adequate for all
present and future needs of W.M. Works. WMW operates at the Company's principal
facilities in West Nyack, NY and has a leased sales office in Brea, California.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of sales and long-lived assets attributable to each of the
principal geographic areas where the Company has sales and the amount of export
sales from the U.S. for each of the last three fiscal years are set forth in
Note 16 to the Company's consolidated financial statements for the year ended
December 29, 2001.
6
Item 3. Legal Proceedings.
Antidumping Proceeding covering Ball Bearings and Parts thereof from China.
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On February 13, 2002, the American Bearing Manufacturers Association filed a
petition ("ABMA Petition") on behalf of the U.S. ball bearing industry with both
the United States International Trade Commission ("ITC") and United States
Department of Commerce ("DOC") seeking the imposition of antidumping duties on
imports of ball bearings from the People's Republic of China. In antidumping
proceedings generally, ITC conducts an investigation as to whether sales of the
imported products which are the subject of the petition ("Products") have caused
or threatened material injury to the subject U.S. industry ("Material Injury
Investigation"). DOC conducts a separate investigation to determine if the
Products have been sold in the U.S. at less than fair value, as determined by
Commerce based upon an estimate of the foreign market value of the Product (i.e.
the price at which the same or similar merchandise is sold or offered for sale
in the principal markets of the home market country) ("Dumping Investigation") .
If the ITC finds that the U.S. industry has been or is threatened with material
injury by sales of the Product in the U.S. and Commerce finds that the Products
have been sold at less than fair value, Commerce enters an order imposing duties
on the unfairly traded Products equal to the percentage difference between the
selling prices in the U.S. and the foreign market value ("Antidumping Order").
Exporters who are subject to the Antidumping Order are required to post
antidumping deposits with U.S. Customs Service on each shipment of Product into
the U.S. The duty rates fixed in the Antidumping Order are subject to annual
review by Commerce.
Based on the ABMA Petition, the ITC has commenced its Material Injury
Investigation and Commerce has initiated its Dumping Investigation. The Company
and its joint ventures in the PRC believe that they do not engage in dumping,
will vigorously defend the action, and expect that the proceeding will not have
a material impact on their operations. Nonetheless, adverse findings by ITC and
DOC could result in the imposition of antidumping duties on ball bearings and
parts thereof from NGBC, JGBR, WGBC and/or SPGBC for sale in the U.S. by the
Company. Such imposition could have a material adverse effect on the Company's
financial performance.
WMW vs. Auerbach Maschinenfabrik GMBH
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In its Form 10-K for fiscal year 2000, the Company disclosed an action by WMW
against Auerbach Maschinenfabrik GmbH ("Auerbach"), its U.S. affiliate, Ixion
Auerbach, Inc. and a former WMW employee, for breach of agency contract, theft
of trade secrets, breach of confidentiality agreement and related causes of
action. In December, 2001, WMW agreed to accept $50,000 in full settlement of
the action, which has been paid in full.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been quoted on the NASDAQ Small Cap market
under the symbol "GNRL" since the Company's initial public offering effective
February 7, 1997.
The following charts set forth the high and low closing prices for each
quarterly period in the last two fiscal years.
2001
-------------------------
Stock Prices High Low
------------ ------------
1st Quarter 6.375 4.781
2nd Quarter 6.000 3.010
3rd Quarter 3.790 2.660
4th Quarter 3.500 2.660
2000
-------------------------
Stock Prices High Low
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1st Quarter 7.625 3.500
2nd Quarter 5.875 4.125
3rd Quarter 6.500 4.938
4th Quarter 5.875 5.000
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for future growth
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future.
At April 8, 2002, the Company had in excess of 500 holders of its Common
Stock.
8
Item 6. Selected Financial Data
The selected financial data set forth below is derived from the Company's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. See Management Discussion and Analysis of Results of Operations
and Financial Condition.
General Bearing Corporation
Selected Financial Data
(In Thousands Except for Per Share Data)
Years Ended
Dec. 27 Jan. 2 Jan. 1 Dec. 30 Dec. 29
1997 1999 2000 2000 2001
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Statement of Operations Data:
Sales $ 47,983 $ 51,089 $64,338 $59,393 $55,653
Operating income $ 1,506 $ 3,060 $ 5,825 $ 1,861 $ 2,901
Income before income tax $ 1,119 $ 2,520 $ 3,761 $ 1,562 $ 1,184
Minority interests $ (19) $ (34) $ 540 $ 1,628 $ 98
Net income $ 3,200 $ 798 $ 2,244 $ 1,879 $ 638
Net income per basic share $ 0.80 $ 0.19 $ 0.55 $ 0.46 $ 0.16
Net income per diluted share $ 0.79 $ 0.19 $ 0.55 $ 0.46 $ 0.16
As Of
Dec. 27 Jan. 2 Jan. 1 Dec. 30 Dec. 29
1997 1999 2000 2000 2001
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Balance Sheet Data:
Total current assets $29,051 $34,907 $38,778 $38,778 $50,819
Total assets $39,680 $45,812 $53,340 $55,264 $76,623
Long-term debt (excluding current
portion) $ 4,090 $ 1,951 $12,861 $16,454 $20,580
9
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Fiscal 2001 compared to Fiscal 2000
Sales. Sales for the fiscal year ended December 29, 2001 ("2001") of
$55,653,000 represents a 6.3% decrease compared to the fiscal year ended
December 30, 2000 ("2000"). Bearing sales decreased 11.5% from 2000 to
$44,474,000 primarily due to the economic slowdown that began during the second
half of 2000. The largest decrease was due to lower sales volume of tapered
roller bearings for heavy duty truck trailers, however, other product lines were
also negatively affected. Machine tool sales of $11,179,000 were 22.5% higher
than 2000 due primarily to the continued development of markets for the
Company's plant in Romania, partially offset by slower economic conditions in
the United States.
In July 2001, General increased its ownership in NGBC, one of its joint
ventures in China, from 42% to 50%. Due to this increased ownership, the
financial statements of NGBC have been fully consolidated for the first time.
The effect on sales was immaterial as NGBC sells the majority of its production
to General for sale in the U.S.
Gross Profit. Gross profit for 2001 of $17,515,000 represents a 5.2%
decrease compared to 2000. As a percentage of sales, gross profit ("GP%") was
31.5% for 2001 compared to 31.1% for 2000. GP% for Bearings was 29.7% in 2001
compared to 30.9% in 2000. This decrease was mainly due to lower sales volume
and introductory pricing necessary to increase market share. GP% for machine
tools was 38.6% in 2001 compared to 32.1% in 2000. This increase is mainly due
to higher sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") as a percentage of sales were 26.3% in 2001
compared to 28.0% in 2000. This decrease is primarily due to reduced expenses,
partially offset by decreased sales volume. S,G&A decreased by $2,001,000. S,G&A
decreased in the Bearings segment by $965,000 mainly due to lower sales related
variable costs, promotion expense and legal expense, partially offset by higher
bad debt expense. S,G&A for machine tools decreased by $1,036,000 mainly due to
reduced bad debt expenses and lower costs for trade conventions as well as the
implementation of cost reduction programs to offset the economic conditions in
the United States.
Operating Income. Operating income for 2001 of $2,901,000 represents a
55.9% increase compared to 2000. Operating income for the Bearings segment
decreased 30.3% compared to 2000 to $3,179,000 primarily due to lower sales
volume and lower GP%, partially offset by lower S,G&A. Operating income for
Machine Tools increased 89.7% compared to 2000 to a loss of $278,000 primarily
due to higher sales volume and reduced S,G&A.
Other Expenses, net. Other expenses, net was $1,717,000 in 2001 compared
to $299,000 in 2000 mainly due to reduced equity in income of affiliates
("equity income") and a one-time charge as described below. Net interest expense
was $1,148,000 in 2001 compared to $1,145,000 in 2000. Equity income was $60,000
in 2001 compared to $669,000 in 2000. Lower sales to General due to economic
conditions in the U.S. reduced the earnings of its joint ventures. The
consolidation of NGBC's financial statements also caused a decrease in equity
income. Additionally, the 2000 equity income includes the Company's share of net
earnings from a joint venture prior to the inclusion of an additional partner.
2001 also includes a one-time charge of $763,000 for an agreement reached
between General and Gussack Realty Company ("GRC"), allocating the proceeds and
litigation costs from the previously reported litigation with Xerox (see the
Company's report on Form 8-K dated May 29, 2001 as well as the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 2000.) The
reimbursement, due to GRC in the form of additional rent payments by General of
$18,780.17 per month for 48 months, commenced in June 2001. Foreign currency
exchange gains of $40,000 in 2001 and $2,000 in 2000 reflect the effect of
changes in foreign exchange rates and accounting rules for financial reporting
in hyperinflationary economies. Other income was $94,000 in 2001 compared to
$175,000 in 2000.
Income Tax. The Company's effective income tax rate was 37.8% in 2001
compared to 83.9% in 2000. The 2001 effective rate reflects a normal rate of
taxation. The 2000 effective rate reflects an increase in the valuation
allowance for deferred tax assets.
10
Net Income. Net income for 2001 decreased 66.0% from 2000 to $638,000 or
$.16 per basic and diluted share, from $1,879,000 or $.46 per basic and diluted
share in 2000, primarily due to lower sales volume and increased other expenses,
net, partially offset by reduced S,G&A.
Fiscal 2000 compared to Fiscal 1999
Sales. Sales for 2000 of $59,393,000 represents a 7.7% decrease compared
to the fiscal year ended January 1, 2000 ("1999"). Bearing sales decreased 2.9%
from 1999 to $50,270,000 primarily as a result of decreased sales to the
railroad market. Due to the slowing economy during the second half of the year,
there was also a decrease in sales of tapered roller bearings for heavy duty
truck trailers. Partially offsetting these decreases was a net increase in sales
of ball bearings and drive line components to the automotive industry and higher
sales of industrial ball bearings for various applications. Machine tool sales
of $9,123,000 were 27.3% lower than 1999 mainly due to lower export sales from
Romania. The lower export sales resulted from several orders being delayed by
customers for 2001 delivery as well as production delays and reduced marketing
activity resulting from reduced borrowing capacity.
Gross Profit. Gross profit for 2000 of $18,476,000 represents an 11.8%
decrease compared to 1999. GP% was 31.1% for 2000 compared to 32.6% for 1999.
GP% for Bearings was 30.9% in 2000 compared to 30.5% in 1999. This increase was
mainly due to material cost reductions, increased plant efficiency and a
reduction in sales of tapered journal and other lower margin bearings to the
railroad industry, partially offset by increased inventory provisions. GP% for
machine tools was 32.1% in 2000 compared to 32.6% in 1999. This decrease is
mainly due to the lower sales volume.
Selling, General and Administrative Expenses. S,G&A as a percentage of
sales were 28.0% in 2000 compared to 23.5% in 1999. This increase is primarily
due to the decreased sales volume and increased expenses of $1,488,000. S,G&A
increased in the Bearings Segment by $812,000 mainly due to increased salaries
and professional expenses. S,G&A for machine tools increased by $676,000 mainly
due to a write-down of impaired assets and bad debts expense, partially offset
by lower personnel expenses.
Operating Income. Operating income for 2000 of $1,861,000 represents a
68.1% decrease compared to 1999. Operating income for the Bearing Segment
decreased 18.5% compared to 1999 to $4,560,000 primarily due to increased S,G&A
and decreased sales, partially offset by higher GP%. Operating income for
Machine Tools was a loss of $2,699,000 in 2000 compared to a profit of $232,000
in 1999 primarily due to lower sales volume.
Other Expenses, net. Net interest expense was $1,145,000 in 2000 compared
to $1,371,000 in 1999 mainly due to lower interest rates, partially offset by
higher debt. Equity income was $669,000 in 2000 compared to $181,000 in 1999.
The 2000 equity income includes $238,000, which is the Company's share of net
earnings from three joint ventures that commenced operations during the year.
Foreign currency exchange losses of $2,000 in 2000 compared to $874,000 in 1999
relate to machine tool operations in Romania. Other income was $175,000 in 2000.
There was no Other income in 1999.
Income Tax. The Company's effective income tax rate was 83.9% in 2000
compared to 54.7% in 1999. Both amounts reflect an increase in the valuation
allowance for deferred tax assets.
Net Income. Net income for 2000 decreased 16.3% from 1999 to $1,879,000 or
$.46 per basic and diluted share, from $2,244,000 or $.55 per basic and diluted
share in 1999. The decrease is primarily due to the lower sales volume and
higher S,G&A.
11
Financial Condition, Liquidity and Capital Resources
During the three years ended December 29, 2001, the Company's primary
sources of capital have been net cash provided by operating activities and a
Revolving Credit Facility. The primary demands on the Company's capital
resources have been investments in and advances to affiliates (joint ventures)
and fixed asset purchases to broaden the Company's product offering and improve
operations. At December 30, 2000 and December 29, 2001, the Company had working
capital of $28,246,000 and $30,276,000, respectively.
Cash provided by operating activities in 2001 was $4,273,000. Cash
provided from net income before depreciation and amortization, and also from
reduced inventory was partially offset by increased accounts receivable. The
accounts receivable increase is mainly related to higher periodic sales volume
as days sales outstanding are comparable with historic results.
Cash used in investing activities in 2001 was $1,069,000. General invested
cash of $1,035,000 in NGBC as part of the $1,200,000 required to increase its
ownership from 42% to 50%. The balance was paid in the form of reinvested
dividends. As a result, net cash of $474,000 was added to the Company's
Consolidated Balance Sheet. General also invested cash of $622,000 as part of
the $3,927,000 required to increase its ownership of NNG from 50% to 100%. The
balance was financed by a long-term note payable to the seller. As a result of
this transaction, net cash of $1,512,000 was added to the Company's Consolidated
Balance Sheet. General loaned a total of $600,000 to SGBC, another of its
existing joint ventures in China. During the first quarter of 2002, General
converted these loans as part of the investment required for increased ownership
of SGBC. Cash used in investing activities also includes $2,555,000 for capital
expenditures.
Cash used in financing activities in 2001 was $1,854,000. During 2001, the
Company had a net decrease in debt under its revolving credit facility of
$2,006,000. It had a net increase of $440,000 in Notes payable - banks and
repaid $181,000 against its lease finance facility.
At December 29, 2001, the Company had outstanding debt of $12,747,000
under its Revolving Credit Facility and had further availability of
approximately $6.3 million. At December 29, 2001, the Company was in compliance
with all of its loan covenants. Additionally, the Company had outstanding debt
of $897,000 against a $1,120,000 line of credit of which $800,000 expires in
October 2002 and $320,000 expires in October 2004.
The Company believes that funds generated from continuing operations,
capital lease financing and borrowing under the existing and any future
revolving credit facilities will be sufficient to finance the Company's stock
buyback program and investment commitments as well as its anticipated working
capital and capital expenditure requirements for at least the next 24 months.
The Company's operating cash flow could be adversely affected if there was a
decrease in demand for the Company's products or if the Company was unable to
continue to reduce its inventory. Also, a decrease in demand could adversely
affect the Company's liquidity if General was unable to agree to terms on a
revolving credit facility when the current facility expires on April 30, 2003.
The table and notes below describe the Company's contractual obligations related
ot its liquidity.
Payments Due by Period
-------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Total year years years years
------- ----- ------- ------ ----
Contractual Obligations:
Bank revolving line of credit $12,747 $ -- $12,747 $ -- $ --
Capital lease obligations 663 180 483 -- --
Operating leases 5,672 1,036 3,414 1,222 --
Notes payable 6,470 200 3,231 2,505 534
Equity investment obligations 4,421 2,421 2,000 -- --
------- ----- ------- ------ ----
Total contractual cash obligations $29,973 $3,837 $21,875 $3,727 $534
======= ====== ======= ====== ====
The Company also has a net payable to General-IKL Corp. an affiliate, in
the amount of $599,000. The Company cannot estimate when this amount will be due
as amounts receivable from and payable to General-IKL Corp., are subject to
collection and repayment restrictions due to sanctions imposed by the U.S.
government on the countries comprising the former Republic of Yugoslavia.
General accrues interest on the balances due to and from this affiliate.
The Company uses letters of credit to support certain of its purchases and
certain advance payments received from customers in the normal course of
business.
JGBR has guaranteed certain obligations of an unrelated third party
totaling $2,651,000 at December 29, 2001.
Inflation
The effect of inflation on the Company has not been significant during the
last two fiscal years.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 is effective, as
amended, for years beginning after June 15, 2000. FAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of the hedged transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("FAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" which amended FAS 133. The amendments in FAS 138 address
certain implementation issues and relate to such matters as the normal purchases
and normal sales exception, the definition of interest rate risk, hedging
recognized foreign currency denominated assets and liabilities, and intercompany
derivatives.
12
Effective December 31, 2000, the Company has adopted FAS 133 and FAS 138.
The initial impact of adoption on the Company's financial statements was
recorded in 2001 and was not material. The ongoing effect of adoption on the
Company's consolidated financial statements will be determined each quarter by
several factors, including the specific hedging instruments in place and their
relationships to hedged items, as well as market conditions at the end of each
period.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company adopted
SAB 101 in 2000 and there was no material effect on the Company's operating
results.
The consolidated financial statements reflect, for all periods presented,
the adoption of the classification requirements pursuant to Emerging Issues Task
Force ("EITF") 00-10, Accounting for Shipping and Handling Fees and Costs, EITF
00-14, Accounting for Certain Sales Incentives, and EITF 00-22, Accounting for
"Points" and Certain Other Time Based or Volume Based Sales Incentive Offers,
and Offers for Free Products to be Delivered in the Future, which were effective
in the Company's fourth quarter of 2000. The Company reclassified to "Net sales"
income from freight charged to customers, and the cost of rebates provided to
customers pursuant to promotional incentive programs, which were historically
included in "Selling, general and administrative" expenses for all periods
presented.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
pronouncement eliminated the use of the "pooling of interests" method of
accounting for all mergers and acquisitions. As a result, all mergers and
acquisitions will be accounted for using the "purchase" method of accounting.
SFAS No. 141 is effective for all mergers and acquisitions initiated after June
30, 2001. Adoption of this pronouncement had no impact on the Company's
financial results.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
intangible assets (excluding goodwill) acquired individually or with a group of
other assets at the time of their acquisition. It also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. Intangible assets (excluding goodwill) acquired outside of a
business combination will be initially recorded at their estimated fair value.
If the intangible asset has a finite useful life, it will be amortized over that
life. Intangible assets with an indefinite life are not amortized. Both types of
intangible assets will be reviewed annually for impairment and a loss recorded
when the asset's carrying value exceeds its estimated fair value. The impairment
test for intangible assets consists of comparing the fair value of the
intangible asset to its carrying value. Fair value for goodwill and intangible
assets is determined based upon discounted cash flows and appraised values. If
the carrying value of the intangible asset exceeds its fair value, an impairment
loss is recognized. Goodwill will be treated similar to an intangible asset with
an indefinite life. As required, the Company will adopt SFAS No. 142 effective
January 1, 2002. The Company believes that the adoption of this pronouncement
will not have a material impact on the Company's financial results.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the period
it is incurred. This cost is initially capitalized and amortized over the
remaining life of the underlying asset. Once the obligation is ultimately
settled, any difference between the final cost and the recorded liability is
recognized as a gain or loss on disposition. As required, the Company will adopt
SFAS No. 143 effective January 1, 2003. The Company believes that the adoption
of this pronouncement will not have a material impact on the Company's financial
results.
13
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets." This pronouncement addresses how
to account for and report impairments or disposals of long lived assets. Under
SFAS No. 144, an impairment loss is to be recorded on long lived assets being
held or used when the carrying amount of the asset is not recoverable from its
expected future undiscounted cash flows. The impairment loss is equal to the
difference between the asset's carrying amount and estimated fair value. In
addition, SFAS No. 144 requires long lived assets to be disposed of by other
than a sale for cash to be accounted for and reported like assets being held and
used. Long lived assets to be disposed of by sale are to be recorded at the
lower of their carrying amount or estimated fair value (less costs to sell) at
the time the plan of disposition has been approved and committed to by the
appropriate company management. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company believes that the adoption of
this pronouncement will not have a material impact on the Company's financial
results.
Forward Looking Statements
Except for historical information contained herein, statements contained
in this Form 10-K constitute forward-looking statements made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve material risks and uncertainties,
including, without limitation, statements as to management's beliefs,
strategies, plans, projections, expectations or opinions related to the
Company's future performance which are based on a number of assumptions that may
ultimately prove to be inaccurate.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
INTEREST RATE RISK
The Company's primary market risks are fluctuations in interest rates and
variability in interest rate spread relationships (i.e., prime to LIBOR spreads)
on its bank debt (see Note 8 to the Consolidated Financial Statements). As of
December 29, 2001, the Company had $8.1 million outstanding in an interest rate
swap. This swap is used to convert floating rate debt relating to the Company's
revolving credit agreement to fixed rate debt to reduce the Company's exposure
to interest rate fluctuations. The net result was to substitute a fixed interest
rate of 9.17% for the variable rate. The swap amortizes by $75,000 per month and
terminates in December 2007. Under the interest rate environment during the year
ended December 29, 2001, the Company's interest rate swap agreement resulted in
additional expense of approximately $270,000.
The Company's management believes that fluctuations in interest rates in
the near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
FOREIGN CURRENCY RISK
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements from domestic companies with international
customers are denominated in U.S. dollars. Only a small fraction of the
Company's purchases are denominated in foreign currency. Due to this limited
activity, the Company does not expect any material loss with respect to foreign
currency risk.
14
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
FOR THE THREE YEARS ENDED DECEMBER 29, 2001
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants.......................... F-16
Report of Independent Certified Public Accountants.......................... F-17
Report of Independent Certified Public Accountants.......................... F-18
Consolidated Balance Sheets, December 30, 2000 and December 29, 2001........ F-19
Consolidated Statements of Operations for the Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001.................... F-20
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended January 1, 2000, December 30, 2000 and December 29, 2001.............. F-21
Consolidated Statements of Cash Flows for the Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001.................... F-22
Notes to Consolidated Financial Statements.................................. F-23 - 45
15
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
General Bearing Corporation
We have audited the accompanying consolidated balance sheet of General Bearing
Corporation and subsidiaries as of December 29, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 General Bearing
Corporation and subsidiaries as of December 29, 2001, 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.
Urbach Kahn & Werlin LLP
New York, New York
April 10, 2002
F-16
Report of Independent Certified Public Accountants
To the Stockholders
General Bearing Corporation
West Nyack, New York
We have audited the accompanying consolidated balance sheet of General Bearing
Corporation and subsidiaries as of December 30, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 30, 2000. These financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Rockland Manufacturing
Company and WMW Machinery Company, Inc., (wholly owned subsidiaries) whose
statements collectively reflect assets of 9.5% in the consolidated balance sheet
presented as of December 30, 2000 and revenues of 12.8% and 13.4% of the
related consolidated totals, for each of the two years in the period ended
December 30, 2000, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Rockland Manufacturing Company and WMW Machinery
Company, Inc. is based solely on the report of the other auditors.
We conducted our audits 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 audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of General Bearing Corporation and
subsidiaries as of December 30, 2000 and the results of their operations and
their cash flows for each of the two years in the period ended December 30,
2000, in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
New York, New York
April 25, 2001
F-17
Report of Independent Certified Public Accountants
To the Partners and Stockholders
Rockland Manufacturing Company and WWW Machinery Company, Inc.
We have audited the balance sheets of Rockland Manufacturing Company and WMW
Machinery Company, Inc. as of December 30, 2000, and the related statements of
operations, changes in partners' capital and shareholders' equity and cash flows
for the fiscal years ended December 30, 2000 and January 1, 2000, not separately
presented herein. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rockland Manufacturing Co. and
WWW Machinery Company, Inc. as of December 30, 2000 and the results of their
operations and their cash flows for the fiscal years ended December 30, 2000 and
January 1, 2000, in conformity with accounting principles generally accepted in
the United States of America.
Urbach, Kahn & Werlin LLP
New York, New York
February 8, 2001
F-18
General Bearing Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, except for shares and per share data)
================================================================================
December 29, December 30,
2001 2000
- --------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1,847 $ 497
Accounts receivable, net of allowance for doubtful
accounts of $874 in 2001 and $988 in 2000 13,355 6,478
Inventories 30,116 29,560
Prepaid expenses and other current assets 4,756 1,568
Advances to affiliates 114 230
Deferred tax assets 631 445
- --------------------------------------------------------------------------------------------
Total current assets 50,819 38,778
- --------------------------------------------------------------------------------------------
Fixed assets, net of accumulated depreciation 22,049 8,643
- --------------------------------------------------------------------------------------------
Investment in, advances to and accounts receivable
from joint ventures and affiliates 2,841 7,475
- --------------------------------------------------------------------------------------------
Other assets 915 368
- --------------------------------------------------------------------------------------------
Total Assets $ 76,624 $ 55,264
============================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Note payable - banks $ 5,415 $ 339
Accounts payable 9,781 4,642
Due to affiliates 306 746
Accrued expenses and other current liabilities 4,660 4,623
Current maturities of long term debt 381 182
- --------------------------------------------------------------------------------------------
Total current liabilities 20,543 10,532
- --------------------------------------------------------------------------------------------
Long term debt, net of current maturities 20,580 16,454
- --------------------------------------------------------------------------------------------
Other long term liabilities - affiliate 491 --
- --------------------------------------------------------------------------------------------
Deferred taxes 320 275
- --------------------------------------------------------------------------------------------
Minority interests 10,119 3,218
- --------------------------------------------------------------------------------------------
Commitments and contingencies (Note 15)
Stockholders' equity
Common shares - par value $.01 per share; authorized
19,000,000 shares; issued 7,088,950 and 7,072,950 shares 71 71
Paid-in capital 40,094 39,994
Accumulated other comprehensive loss (737) (10)
Treasury stock, at cost; 3,040,270 and 2,960,300 shares (276) (51)
Deficit (14,581) (15,219)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 24,571 24,785
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 76,624 $ 55,264
============================================================================================
See Notes to Consolidated Financial Statements
F-19
General Bearing Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands except for shares and per share data)
================================================================================
December 29, December 30, January 1,
2001 2000 2000
- ----------------------------------------------------------------------------------------------------
Sales $ 55,653 $ 59,393 $ 64,338
Cost of sales 38,138 40,917 43,386
- ----------------------------------------------------------------------------------------------------
Gross profit 17,515 18,476 20,952
Selling, general and administrative expenses 14,614 16,615 15,127
- ----------------------------------------------------------------------------------------------------
Operating income 2,901 1,861 5,825
Other expenses, net 1,717 299 2,064
- ----------------------------------------------------------------------------------------------------
Income before income taxes 1,184 1,562 3,761
Income taxes 448 1,311 2,057
- ----------------------------------------------------------------------------------------------------
Income before minority interests 736 251 1,704
Minority interests (98) 1,628 540
- ----------------------------------------------------------------------------------------------------
Net income $ 638 $ 1,879 $ 2,244
====================================================================================================
Income per common share:
Basic $ 0.16 $ 0.46 $ 0.55
Diluted $ 0.16 $ 0.46 $ 0.55
Weighted average number of common shares:
Basic 4,108,993 4,109,565 4,112,453
Diluted 4,108,993 4,109,565 4,112,602
See Notes to Consolidated Financial Statements
F-20
General Bearing Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands except for shares)
================================================================================
Common Shares Accumulated Other Treasury Stock
----------------- Comprehensive Paid-In ------------------ Comprehensive
Shares Amt. Income Capital Shares Amt. Income Deficit
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999 7,058,950 $ 71 $ -- $39,698 3,000,000 $ -- -- $(17,248)
Sale of 6,000 common
shares - stock options
exercised 6,000 -- -- 42 -- -- -- --
Tax benefit - stock
options exercised -- -- -- 4 -- -- -- --
Foreign currency
translation adjustment -- -- (7) -- -- -- (7) --
Net income -- -- -- -- -- -- 2,244 2,244
------
Comprehensive income -- -- -- -- -- -- 2,237 --
--------- ----- ----- ------- --------- ----- ------ --------
Balance, January 1, 2000 7,064,950 71 (7) 39,744 3,000,000 -- -- (15,004)
Shares issued - board
compensation 8,000 -- -- 43 -- -- -- --
Treasury shares, at cost -- -- -- -- 10,300 (51) -- --
Foreign currency
translation adjustment -- -- (3) -- -- -- (3) --
Distribution to WMC
shareholders -- -- -- -- -- -- -- (2,094)
Options exercised -- -- -- 207 (50,000) -- -- --
Net income -- -- -- -- -- -- 1,879 1,879
------
Comprehensive income -- -- -- -- -- -- 1,876 --
--------- ----- ----- ------- --------- ----- ------ --------
Balance, December 30,
2000 7,072,950 71 (10) 39,994 2,960,300 (51) -- (15,219)
Shares issued - board
compensation 16,000 -- -- 100 -- -- -- --
Treasury shares, at cost -- -- -- -- 79,970 (225) -- --
Net income -- -- -- -- -- -- 638 638
Mark to market-interest
rate swap -- -- (727) -- -- -- (727) --
--------- ----- ----- ------- --------- ----- ------ --------
Comprehensive income -- -- -- -- -- -- (89) --
--------- ----- ----- ------- --------- ----- ------ --------
Balance, December 29,
2001 7,088,950 $ 71 $(737) $40,094 3,040,270 $(276) -- $(14,581)
========= ===== ===== ======= ========= ===== ====== ========
See Notes to Consolidated Financial Statements
F-21
General Bearing Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
================================================================================
December December January 1,
29, 2001 30, 2000 2000
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 638 $ 1,879 $ 2,244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interests 98 (1,628) (540)
Depreciation and amortization 1,066 1,233 789
Deferred income taxes (142) 212 1,011
Equity in income of joint ventures and affiliates (60) (669) (181)
Net loss on equipment sales and disposal 57 -- --
Other non - cash items charged to income 100 43 --
Changes in:
Accounts receivable (1,522) 1,505 (1,242)
Inventories 3,758 (4,202) 652
Prepaid expenses and other assets 554 (124) (918)
Advances to / (from) affiliates 999 369 (4,176)
Accounts payable and accrued expenses (1,273) 2,938 2,246
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,273 1,556 (115)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investments in affiliates, net -- (750) (648)
Advances to affiliates (600) (2,597) --
Increase in equity interests, net of cash acquired 1,986 -- --
Fixed asset purchases (2,555) (948) (731)
Proceeds from sale of fixed assets 100 -- --
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,069) (4,295) (1,379)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Repayment of capital lease (181) (650) (782)
Increase (decrease) in note payable - banks 440 (3,459) (7,517)
Net proceeds from / (repayment of) revolving credit facility (2,006) 3,347 11,406
Proceeds from equipment financing -- 968 --
Proceeds from long-term debt 118 -- 678
Proceeds from sale of common shares -- 5 42
Return of capital -- (500) --
Purchase of treasury stock (225) (51) --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,854) (340) 3,827
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,350 (3,079) 2,333
Cash and cash equivalents, beginning of period 497 3,576 1,243
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,847 $ 497 $ 3,576
=============================================================================================================
See Notes to Consolidated Financial Statements
F-22
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies
The Company
General Bearing Corporation ("General") and subsidiaries
(collectively, "the Company") are actively engaged in two business
segments:
>> Bearings. The Company, through General and its 50% or more
owned joint ventures, Rockland Manufacturing Company
("Rockland"), Ningbo General Bearing Company, Ltd. ("NGBC")
and Jiangsu General Ball and Roller Company, Ltd. ("JGBR"),
manufactures, sources, assembles and distributes a variety of
bearings and bearing components, including ball bearings,
tapered roller bearings, spherical roller bearings and
cylindrical roller bearings. Under the Hyatt(R) and The
General(R) trademarks, the Company supplies original equipment
manufacturers ("OEMs") and the industrial aftermarket, both
primarily in the United States. The Company's products are
used in a broad range of applications, including automobiles,
railroad cars, locomotives, trucks, heavy duty truck trailers,
office equipment, machinery and appliances. Approximately 80%
of fiscal 2001 revenues relate to bearings and bearing
components (85% and 80% in 2000 and 1999, respectively).
>> Machine Tools. The Company, through WMW Machinery Company,
Inc. ("WMW"), a wholly-owned subsidiary, distributes machine
tools in North America. The Company also distributes machine
tools throughout the rest of the world through its
majority-owned subsidiary, World Machinery Group, BV ("WMG").
Summary of Significant Accounting Policies
Principles of Consolidation:
----------------------------
The accompanying consolidated financial statements include the
accounts of General, its wholly owned subsidiaries and all joint
ventures in which General maintains control and has at least a 50%
ownership share. Investments in other joint ventures are carried
under the equity method. The years ended December 29, 2001, December
30, 2000, and January 1, 2000 are referred to as fiscal 2001, fiscal
2000, and fiscal 1999, respectively.
The operations of General are included in the Company's bearing and
bearing components segment. A summary description of each of the
Company's wholly owned subsidiaries and joint ventures in which
General maintains control and has at least a 50% ownership interest
are as follows:
Bearings Segment:
-----------------
Ningbo General Bearing Company, Ltd. ("NGBC"), established in 1998
for an initial term of sixteen years, is a joint venture with China
Ningbo Genda Bearing Company, Ltd. Located in Yuyao City, Peoples
Republic of China (PRC), this venture manufactures ball and roller
bearings and their components. Initially a 33% owned joint venture
of General, General increased its ownership to 42% in 2000 by
contributing an additional $650,000 in cash. In July 2001, General
increased its ownership to 50% by contributing $1.2 million in cash
and General assumed control of management of the operations.
Operations since July 2001 have been fully consolidated in the
financial statements. Upon expiration or early termination of the
business term, assets will be distributed to the partners in the
same proportion as their respective paid investments to the
registered capital.
F-23
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
NN General, LLC ("NNG") established in March 2000, was initially a
50% owned joint venture with NN Ball & Roller, Inc. ("NN"), an
unrelated party. In connection with this venture General agreed to
share its 60% interest in JGBR. General's initial cash investment in
NNG was $100,000. General also advanced NNG loans amounting to
approximately $2,767,000 including interest at the applicable
federal rate. On December 27, 2001, General and NN contributed all
loans and accrued interest advanced to NNG to NNG's capital and
General purchased NN's 50% interest for cash and notes valued at
approximately $3.9 million (book value), effectively increasing
General's interest in JGBR back to 60%.
JGBR, established in 1999, is a joint venture with Jiangsu Lixing
Steel Ball Factory ("JSBF"), an unrelated party. Located in Rugao
City, China, this venture is comprised of the operations of JSBF, a
manufacturer of rolling elements for bearings. Effective with
General's acquisition of NN's interest in NNG, the Company has
consolidated the balance sheet of JGBR at December 29, 2001. The
Company has recorded income from its investment in JGBR at December
29, 2001 on the equity method. Effective December 30, 2001
operations of JGBR will be fully consolidated.
Rockland, a general partnership, is owned equally by General and
Wafangdian USA, Inc., a wholly owned subsidiary of Wafangdian
Bearing Company, Ltd. ("WFGDN"). Rockland's principal business is
the design and manufacture of cylindrical roller and spherical
roller bearings and bearing components. Substantially all of
Rockland's consigned inventory (see Note 1) is purchased from WFGDN,
or Wafangdian General Bearing Company, Ltd. ("WGBC", see below), a
foreign joint venture in which General owns a minority interest.
Substantially all of Rockland's production is sold to General.
General IKL Corporation ("IKL") is an inactive joint venture located
in the former Republic of Yugoslavia in which General holds a 50%
interest.
Machine Tools Segment:
----------------------
World Machinery Company ("World") is a holding company and is 100%
owned by General. World exists primarily to hold stock of other
companies. World owns 2,950,000 shares of General's common stock
which have been treated as treasury stock in the consolidated
financial statements.
WMW is a wholly owned subsidiary of World. WMW is engaged in the
distribution of machines and machine tools in North America,
principally to machine tool dealers and manufacturing companies.
WMG is a 60% owned joint venture of World located in the
Netherlands, whose principal asset is a 50.97% interest in Masini
Unelte Bacau S.A. ("World Machinery Works") a Romanian manufacturer
of machine tools acquired during 1998 pursuant to Romania's
privatization program. The majority of World Machinery Works' sales
are made through WMG, which utilizes independent regional sales
agencies.
F-24
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
A summary of joint ventures in which the Company holds less than a
50% interest are as follows:
Shanghai General Bearing Company, Ltd. ("SGBC") was established in
1987 as a 25% owned joint venture with Shanghai Roller Bearing
Factory ("SRBF"), located in Shanghai, PRC. The venture is a limited
liability company formed in accordance with PRC law. SGBC produces
tapered roller bearings, which the Company imports into the U.S. for
further assembly, inspection, testing and distribution. In February
2002, General increased its investment in SGBC to 50% and assumed
control of the operations. General maintains the exclusive right to
sell the products of SGBC in the United States.
Shanghai Pudong General Bearing Company, Ltd ("SPBGC") is a 25%
owned joint venture with Shanghai Xiua Industrial Corporation,
established in 1996. Located in the Pudong Industrial Zone of
Shanghai, China, this venture produces ball bearings for sale in the
U.S. by General.
WGBC is a 25% owned joint venture with Wafangdian Bearing Company.
This venture produces components for spherical roller bearings and
railroad bearings in the PRC. General sells WGBC's products in the
United States.
All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents:
-----------------
The Company considers all investments in highly liquid debt
instruments with maturities of three months or less from date of
purchase and money market funds to be cash equivalents.
Inventories:
------------
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
During fiscal 1999, Rockland negotiated revised terms with WGBC
under which it purchases inventory. Rockland maintains the right to
return all unsold inventory and is obligated to remit payment for
inventory only upon sale. Accordingly, the Company treats these
materials to be inventory held on consignment and has not recorded
them in inventory at December 29, 2001, December 30, 2000 and
January 1, 2000. Inventory at December 29, 2001 and December 30,
2000 consists of approximately $1,494,000 and $1,210,000,
respectively, of inventory acquired under the previously existing
purchasing arrangement, inventory held for rework, and costs related
to consigned goods. The consigned inventory amounted to
approximately $3,194,000 and $3,450,000 at December 29, 2001 and
December 30, 2000, respectively.
Comprehensive Income:
---------------------
Comprehensive income refers to revenue, expenses, gains and losses
that under generally accepted accounting principles are excluded
from net income, as these amounts are recorded directly as
adjustments to stockholders' equity. The Company's comprehensive
income is comprised of foreign currency translation adjustments and
accounting for an interest rate swap.
The Company uses an interest rate swap agreement as a derivative to
modify the interest characteristics of its outstanding floating rate
long-term debt, to reduce its exposure to fluctuations in interest
rates. The Company's accounting policies for these instruments are
based on its designation of such instruments as hedging
transactions. The Company does not enter into such contracts for
speculative purposes. The Company records all derivatives on the
balance sheet at fair value.
F-25
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
For derivative instruments that are designated and qualify as a fair
value hedge (i.e. hedging the exposure to changes in the fair value
of an asset or a liability or an identified portion thereof that is
attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting gain or loss on the
hedged item attributable to the hedged risk are recognized in
earnings in the current period. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e. hedging the
exposure of variability of expected future cash flows that is
attributable to a particular risk), the effective portion of the
gain or loss on the derivative instrument is reported as a component
of Accumulated Comprehensive Income (a component of stockholders'
equity) and reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings. The remaining
gain or loss on the derivative instrument, if any (i.e. the
ineffective portion of any portion of the derivative excluded from
the assessment of effectiveness) is recognized in earnings in the
current period. For derivative instruments not designated as hedged
instruments, changes in their fair values are recognized in earnings
in the current period.
The comprehensive income for each of the three years in the period
ended December 29, 2001 is presented in the Statements of Changes in
Stockholders' Equity.
Fixed Assets:
-------------
The cost of depreciable plant and equipment is depreciated for
financial reporting purposes over the estimated useful lives using
the straight-line or declining balance methods. The estimated lives
for each property classification are as follows:
Classification Estimated Life (Years)
--------------------------------------------------------------------
Land No depreciation
Buildings 10 - 40
Machinery and equipment 3 to 10
Furniture and fixtures 10
Transportation equipment 3 to 5
Leasehold improvements Lesser of life of lease or useful life
Software 5
--------------------------------------------------------------------
Expenditures for maintenance, repairs and minor renewals or
betterments are charged against income. Major renewals and
replacements are capitalized.
Evaluating Recoverability of Long Lived Assets:
-----------------------------------------------
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. The Company assesses
recoverability of these assets by estimating future nondiscounted
cash flows. Any long-lived assets held for disposal are reported at
the lower of their carrying amounts or fair value less cost to sell.
During 2000, the Company recorded an impairment write-down of
$501,000.
Fiscal Year:
------------
The reporting period for the Company is a 52-53 week fiscal year.
There were 52 weeks in the periods ended December 29, 2001, December
30, 2000 and January 1, 2000.
Revenue Recognition:
--------------------
The Company recognizes revenue when products are shipped. The
Company provides, as a reduction in sales, for anticipated returns
and allowances on defective merchandise based on known claims and an
estimate of anticipated returns.
Shipping and Handling Costs:
----------------------------
The Company accounts for certain shipping and handling costs as a
component of "Selling, general and administrative expenses." These
costs represent primarily the freight and direct compensation costs
of employees who pick, pack and otherwise prepare, if necessary,
merchandise for shipment to the Company's customers. Total costs
were $650,000, $683,000 and $707,000 in fiscal 2001, 2000 and 1999,
respectively.
Advertising:
------------
Advertising costs are expensed as incurred. Advertising expense for
each of the three years in the period ended December 29, 2001 was
$410,000, $875,000 and $360,000, respectively.
F-26
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Income Taxes:
-------------
Prior to the transaction described in Note 2, General filed a
consolidated Federal income tax return with World through the date
of its initial public offering, completed in February, 1997;
thereafter, it filed its own federal returns. State and local tax
returns are filed separately. Federal income taxes were calculated
as if General filed its tax return on a separate return basis for
all periods presented. World filed a consolidated federal income tax
return with its wholly owned subsidiaries and separate state and
local tax returns. Subsequent to the transaction described in Note
2, the Company files a consolidated Federal income tax return.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and operating loss carryforwards.
Use of Estimates:
-----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Estimated Fair Value of Financial Instruments:
----------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure About Fair Value of Financial Instruments", requires
disclosures of fair value information about financial instruments,
for which it is practicable to estimate the value, whether or not
recognized on the balance sheet.
The fair value of financial instruments, including cash, accounts
receivable and accounts payable, approximate their carrying value
because of the current nature of these instruments. The carrying
amounts of the Company's note payable - bank and long-term debt -
bank approximate fair value because the interest rates on these
instruments are subject to changes with market interest rates. To
reduce its exposure to fluctuations in interest rates, the Company
is party to an interest rate swap with its bank (Note 8). It is not
practical to determine the fair value of receivables from, payables
to and long-term debt payable to affiliates and other because of the
nature of their terms.
Concentration of Credit Risk:
-----------------------------
The Company extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure
for credit losses and maintains allowances for anticipated losses.
The Company obtained 76%, 85% and 77% of its bearing and component
requirements from various Chinese joint ventures in the fiscal years
ended 2001, 2000 and 1999, respectively. In 2001, 2000 and 1999,
respectively, the Company obtained 51%, 87% and 64% of its machine
tool requirements from various companies in Romania.
Cash accounts at financial institutions from time to time may exceed
the federal depository insurance coverage limit.
Foreign Currency Translation:
-----------------------------
Foreign currency financial statements of foreign operations where
the local currency is the functional currency are translated using
exchange rates in effect at period end for assets and liabilities
and average exchange rates during the period for results of
operations. Related translation adjustments are reported as a
separate component of stockholders' equity. For foreign operations
where the US dollar is the functional currency and for countries
which are considered highly inflationary, translation practices
differ in that inventories, properties, accumulated depreciation and
depreciation accounts are translated at historical rates of exchange
and translation adjustments are included in earnings. Gains and
losses from foreign currency transactions are generally included in
earnings. All foreign subsidiaries, except for W.M. Works, use the
local currency as the functional currency. The effect on cash of
foreign currency translations is not material.
F-27
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Stock-Based Compensation:
-------------------------
The Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("SFAS No. 123") requires entities which have
arrangements under which employees receive shares of stock or other
equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of its stock
to either record the fair value of the arrangements or disclose the
proforma effects of the fair value of the arrangements. The Company
has adopted the disclosure method of SFAS No. 123.
Earnings Per Common Share:
--------------------------
Earnings per common share are computed on the basis of the weighted
average number of common shares outstanding during the year. Basic
earnings per share excludes and diluted earnings per share includes
any dilutive effects of options, warrants, and convertible
securities.
Reclassification:
-----------------
Certain prior year amounts have been reclassified to conform with
the current year presentation.
Recent Accounting Standards:
----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133 ("FAS
133"), "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 is effective, as amended, for years beginning
after June 15, 2000. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of the hedged transaction and the
type of hedge transaction. The ineffective portion of all hedges
will be recognized in earnings.
In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138 ("FAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" which amended FAS 133.
The amendments in FAS 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales
exception, the definition of interest rate risk, hedging recognized
foreign currency denominated assets and liabilities, and
intercompany derivatives.
Effective December 31, 2000, the Company adopted FAS 133 and FAS
138. The initial impact of adoption on the Company's financial
statements was not material. The ongoing effect of adoption on the
Company's consolidated financial statements will be determined each
quarter by several factors, including the specific hedging
instruments in place and their relationships to hedged items, as
well as market conditions at the end of each period.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on applying
generally accepted accounting principles to revenue recognition in
financial statements. The Company adopted SAB 101 in 2000 and there
was no material effect on the Company's operating results.
The consolidated financial statements reflect, for all periods
presented, the adoption of the classification requirements pursuant
to Emerging Issues Task Force ("EITF") 00-10, Accounting for
Shipping and Handling Fees and Costs, EITF 00-14, Accounting for
Certain Sales Incentives, and EITF 00-22, Accounting for "Points"
and Certain Other Time Based or Volume Based Sales Incentive Offers,
and Offers for Free Products to be Delivered in the Future, which
became effective in the Company's fourth quarter of 2000. The
Company reclassified to "Net sales" income from freight charged to
customers, and the cost of rebates provided to customers pursuant to
promotional incentive programs, which were
F-28
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
historically included in "Selling, general and administrative"
expenses for all periods presented.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
This pronouncement eliminated the use of the "pooling of interests"
method of accounting for all mergers and acquisitions. As a result,
all mergers and acquisitions will be accounted for using the
"purchase" method of accounting. SFAS No. 141 is effective for all
mergers and acquisitions initiated after June 30, 2001. Adoption of
this pronouncement had no impact on the Company's financial results.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting
and reporting for intangible assets (excluding goodwill) acquired
individually or with a group of other assets at the time of their
acquisition. It also addresses financial accounting and reporting
for goodwill and other intangible assets subsequent to their
acquisition. Intangible assets (excluding goodwill) acquired outside
of a business combination will be initially recorded at their
estimated fair value. If the intangible asset has a finite useful
life, it will be amortized over that life. Intangible assets with an
indefinite life are not amortized. Both types of intangible assets
will be reviewed annually for impairment and a loss recorded when
the asset's carrying value exceeds its estimated fair value. The
impairment test for intangible assets consists of comparing the fair
value of the intangible asset to its carrying value. Fair value for
goodwill and intangible assets is determined based upon discounted
cash flows and appraised values. If the carrying value of the
intangible asset exceeds its fair value, an impairment loss is
recognized. Goodwill will be treated similar to an intangible asset
with an indefinite life. As required, the Company will adopt SFAS
No. 142 effective January 1, 2002. The Company believes that the
adoption of this pronouncement will not have a material impact on
the Company's financial results.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of
closing facilities and removing assets. SFAS No. 143 requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period it is incurred. This cost is
initially capitalized and amortized over the remaining life of the
underlying asset. Once the obligation is ultimately settled, any
difference between the final cost and the recorded liability is
recognized as a gain or loss on disposition. As required, the
Company will adopt SFAS No. 143 effective January 1, 2003. The
Company believes that the adoption of this pronouncement will not
have a material impact on the Company's financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets." This pronouncement
addresses how to account for and report impairments or disposals of
long lived assets. Under SFAS No. 144, an impairment loss is to be
recorded on long lived assets being held or used when the carrying
amount of the asset is not recoverable from its expected future
undiscounted cash flows. The impairment loss is equal to the
difference between the asset's carrying amount and estimated fair
value. In addition, SFAS No. 144 requires long lived assets to be
disposed of by other than a sale for cash to be accounted for and
reported like assets being held and used. Long lived assets to be
disposed of by sale are to be recorded at the lower of their
carrying amount or estimated fair value (less costs to sell) at the
time the plan of disposition has been approved and committed to by
the appropriate company management. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company believes
that the adoption of this pronouncement will not have a material
impact on the Company's financial results.
F-29
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 2. Acquisition
In July 2000, General acquired 100% of World, which, prior to the
acquisition, owned 74.8% of the outstanding common stock of General.
World was principally owned by members of General Bearing's Board of
Directors and senior management. This combination has been accounted
for in a manner similar to a pooling of interests. Prior periods
have been restated as if the companies have always been combined. In
consideration for this transaction, General issued 3,140,000 shares
of its common stock, $ .01 per share par value. 2,950,000 shares of
General's common stock, owned by World, are now carried as treasury
stock. Net shares issued (190,000 shares) for the acquisition are
considered outstanding for all periods presented.
Note 3. Inventories
Inventories are comprised as follows at: (In Thousands)
December 29, December 30,
2001 2000
------------------------------------------------------------------------
Bearings and Bearing Products
Finished goods $ 9,096 $ 8,260
Raw materials, purchased parts and work-in
process 16,824 15,736
------------------------------------------------------------------------
25,920 23,996
------------------------------------------------------------------------
Machine Tools
Machines and machine tools 2,457 2,936
Service parts and accessories 1,739 2,628
------------------------------------------------------------------------
4,196 5,564
------------------------------------------------------------------------
$ 30,116 $ 29,560
========================================================================
Note 4. Fixed Assets
Fixed assets are comprised as follows at: (In Thousands)
December 29, December 30,
2001 2000
----------------------------------------------------------------------------
Land and buildings $ 11,154 $ 5,133
Machinery and equipment 17,347 9,279
Furniture and fixtures 1,494 1,494
Leasehold improvements 776 761
Software 891 453
Transportation equipment 666 510
----------------------------------------------------------------------------
32,328 17,630
Less accumulated depreciation and amortization 10,279 8,987
----------------------------------------------------------------------------
$ 22,049 $ 8,643
============================================================================
2001 machinery and equipment includes construction in process of
$1,363,000. 2001 land and buildings includes construction in process
of $2,115,000. The estimated cost to complete construction in
process is immaterial.
Depreciation expense was $995,000, $1,162,000 and $765,000 for each
of the three years in the period ended December 29, 2001.
Amortization expense was $71,000, $71,000 and $24,000 for each of
the three years in the period ended December 29, 2001.
F-30
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 5. Investments in, Advances to and Accounts Receivable from Joint
Ventures and Affiliates
Investment in, advances to and accounts receivable from joint
ventures and affiliates consist of the following at: (In Thousands)
December 29, December 30,
2001 2000
---------------------------------------------------------------------------------
Investments:
Shanghai General Bearing Company, Ltd. $ 822 $ 972
Ningbo General Bearing Company, Ltd. -- 2,304
Shanghai Pudong General Bearing Company, Ltd. 171 162
Wafangdian General Bearing Company, Ltd. 766 781
NN General, LLC -- 230
NNA, LLC (a) -- (82)
---------------------------------------------------------------------------------
1,759 4,367
---------------------------------------------------------------------------------
Advances and accounts receivable:
Short Term
Gussack Realty Company -- 37
Shanghai Pudong General Bearing Company, Ltd. (b) 80 30
Shanghai General Bearing Company, Ltd. 18 124
Wafangdian General Bearing Company, Ltd. 16 13
NN General, LLC -- 26
---------------------------------------------------------------------------------
114 230
---------------------------------------------------------------------------------
Long Term
General IKL Corp. (c) 482 461
Shanghai General Bearing Company, Ltd. (d) 600 --
NN General, LLC -- 2,520
NNA, LLC (a) -- 127
---------------------------------------------------------------------------------
1,082 3,108
---------------------------------------------------------------------------------
$ 2,955 $ 7,705
=================================================================================
(a) NNA, LLC "(NNA"), a 33.33% owned joint venture with General,
was formed in 2000 to market the products of JGBR. The Company
advanced to NNA $127,000, including interest at the applicable
federal rate for a period of 30 years. The rate in effect at
December 30, 2000 was 5.98%. NNA was dissolved in the fourth
quarter of 2001.
(b) General contributed $150,000 in fiscal 1998 representing its
interest in the registered capital. The advances related to
inventory returned to SPGBC. General is not required to
contribute additional capital.
(c) Amounts receivable from and payable to General-IKL Corp., are
subject to collection and repayment restrictions due to the
sanctions imposed by the U.S. government on the countries
comprising the Former Republic of Yugoslavia. General accrues
interest on the balances due to and from this affiliate (see
Note 8).
F-31
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 5. Investments in, Advances to and Accounts Receivable from Joint
Ventures and Affiliates, (Continued)
(d) The advances relate primarily to a loan made by General prior
to General's obtaining a 50% interest and operational control
in February 2002 (see Note 1). Condensed financial data of
SGBC are as follows: (In Thousands)
---------------------------------------------------------------
December 29, December 30,
Balance Sheet: 2001 2000
---------------------------------------------------------------
Current assets $ 4,929 $ 4,904
---------------------------------------------------------------
Total assets 8,201 7,945
---------------------------------------------------------------
Current liabilities 4,912 4,057
---------------------------------------------------------------
Total liabilities 4,912 4,057
---------------------------------------------------------------
Stockholders' equity 3,289 3,888
---------------------------------------------------------------
-------------------------------------------------------------------
December 29, December 30, January 1,
Income Statement: 2001 2000 2000
-------------------------------------------------------------------
Net sales $ 13,763 $ 17,980 $ 17,131
-------------------------------------------------------------------
Gross Profit 1,067 2,512 1,673
-------------------------------------------------------------------
Operating income 239 1,699 773
-------------------------------------------------------------------
Net income 83 835 567
-------------------------------------------------------------------
Note 6. Note Payable - Banks
JGBR has short term unsecured notes payable aggregating $4,636,000,
with various interest rates ranging from 5.12% to 5.36%, maturing
throughout 2002.
W.M. Works has an $800,000 line of credit. Borrowings against the
line at December 29, 2001 amounted to $779,000. The line of credit,
secured by land and buildings of approximately $1,400,000, contains
no major covenants. Interest on outstanding obligations is payable
at 11.5% per year. The line of credit expires on October 8, 2002.
Note 7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following: (In Thousands)
--------------------------------------------------------------------
December 29, December 30,
2001 2000
--------------------------------------------------------------------
Payroll and related benefits $ 929 $ 880
Insurance 280 440
Customer deposits 197 1,518
Sales commissions 189 238
Sales rebates 212 162
Swap obligations 727 --
Dividend payable 424 --
Professional Fees 260 364
Other 1,442 1,021
--------------------------------------------------------------------
Total $ 4,660 $ 4,623
--------------------------------------------------------------------
F-32
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 8. Long-Term Debt
Long-term debt consists of the following at: (In Thousands)
December 29, December 30,
2001 2000
------------------------------------------------------------------------
Bank and other:
Bank revolving line of credit (a) $ 12,747 $ 14,753
Notes payable (b) 6,470 --
Long-term lease obligations (See Note 15) 663 845
------------------------------------------------------------------------
19,880 15,598
Less current maturities (381) (182)
------------------------------------------------------------------------
19,499 15,416
Affiliates:
General - IKL Corp. (see Note 5(c)) 1,081 1,038
------------------------------------------------------------------------
Total long-term debt $ 20,580 $ 16,454
========================================================================
(a) General is obligated to a bank under a revolving line of
credit, which expires on April 30, 2003. The credit agreement
provides General with a secured line of credit of up to $21
million for acquisitions, working capital and general
corporate purposes. The maximum amount available is reduced by
outstanding letters of credit. Interest on outstanding
obligations is payable at either the bank's prime rate plus up
to 1.00%, or LIBOR plus 1.00% to 2.00%. These percentages are
determined quarterly based upon the financial performance of
General. The average monthly rate in effect at December 29,
2001 was 6.36%. Also based upon the financial performance of
General is a commitment fee of either .125% or .25% of unused
availability. The loan is secured by General's assets. The
credit agreement also contains certain restrictive covenants,
which include, among others, maintenance of financial ratios
relating to funded debt, fixed charge coverage and interest
coverage and limitations on capital expenditures and
investments. General is in compliance with all of its loan
covenants.
As of December 29, 2001, borrowing under the credit line
amounted to $12,747,000, and letter of credit commitments
under this credit line amounted to $1,974,000.
As of December 29, 2001, General had $8.1 million
outstanding subject to an interest rate swap. This swap is
used to convert floating rate debt relating to the Company's
revolving credit agreement to fixed rate debt to reduce the
Company's exposure to interest rate fluctuations. The net
result was to substitute a fixed interest rate of 9.17% for
the variable rate. The swap amortizes by $75,000 per month and
terminates in December 2007. Under the interest rate
environment during the year ended December 29, 2001, the
Company's interest rate swap agreement resulted in additional
expense of approximately $270,000.
(b) JGBR has various long term unsecured notes payable aggregating
$2,512,000, with interest at 5.36% maturing between October
2003 and July 2005.
General has a long term note payable of $3,105,000. The
interest rate on the note is the 30 day LIBOR plus 1.5%.
Annual principal installments of $200,000 plus accrued
interest are to be made beginning December 2002, and
continuing thereafter through December 2005. In December 2006,
the outstanding principal balance is payable.
World Machinery Works has a long term loan with a bank
aggregating $118,000, with an interest rate of 12% maturing in
October 2004. Additionally, World Machinery Works has a note
payable in the amount of $534,000 at an interest rate of 8%.
It is expected that the note will be capitalized in 2002.
F-33
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 8. Long-Term Debt, (Continued)
Long term debt as of December 29, 2001 is payable as follows: (In
Thousands)
--------------------------------------------------------------------
2002 $ 381
2003 13,763
2004 1,143
2005 1,554
2006 2,505
Thereafter 534
--------------------------------------------------------------------
$19,880
====================================================================
Note 9. Income Taxes
Federal, state and local income taxes consist of the following for
the fiscal year ended : (In Thousands)
December 29, December 30, January 1,
2001 2000 2000
-------------------------------------------------------------------
Deferred:
Federal $ 299 $ (358) $ (977)
State and local 38 4 (34)
Foreign (195) 142 --
-------------------------------------------------------------------
142 (212) (1,011)
-------------------------------------------------------------------
Current:
Federal (431) (912) (656)
State and local (118) (96) (238)
Foreign (41) (91) (152)
-------------------------------------------------------------------
(590) (1,099) (1,046)
-------------------------------------------------------------------
$ (448) $ (1,311) $ (2,057)
===================================================================
The major elements contributing to the difference between the
Federal statutory rate and the Company's effective tax rate are as
follows:
December 29, December 30, January 1,
2001 2000 2000
---------------------------------------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
Increase / (decrease) in valuation allowance (50.6) 55.2 19.7
State and local income taxes
less federal income tax benefit 6.6 3.9 10.5
Tax effect of differences between
U.S. statutory & foreign effective rates 6.4 10.9 8.6
Equity in (income) loss of affiliates (1.7) (14.6) (1.4)
Dividends recorded 53.9 8.1 --
Other differences (10.8) (13.6) (16.7)
---------------------------------------------------------------------------------------------
Effective rate 37.8% 83.9% 54.7%
=============================================================================================
F-34
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 9. Income Taxes, (Continued)
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities are as follows: (In Thousands)
December 29, December 30,
2001 2000
-----------------------------------------------------------------------------
Gross deferred tax assets
Accounts receivable and inventory allowances $ 477 $ 392
Net operating loss carryforwards 1,464 1,930
Foreign losses 613 613
All other 345 399
-----------------------------------------------------------------------------
2,899 3,334
Gross deferred tax liabilities
Plant and equipment depreciation differences (204) (232)
All other (95) (44)
-----------------------------------------------------------------------------
2,600 3,058
Valuation allowance (2,289) (2,888)
-----------------------------------------------------------------------------
Net deferred tax asset $ 311 $ 170
=============================================================================
The Company has provided a valuation allowance against all of the
deferred tax assets of World and WMW.
The valuation allowance has increased / (decreased) by ($599,000),
$861,000 and $335,000 in 2001, 2000 and 1999, respectively.
As of December 29, 2001, the Company had aggregate federal tax loss
carryovers of approximately $4.0 million, which may be used to
offset future taxable income of certain of its subsidiaries,
expiring at various dates through the year 2019.
As of December 29, 2001, cumulative foreign losses amounted to
approximately $2.5 million. The Company has provided a valuation
allowance against those losses.
Note 10. Discretionary Profit-Sharing Plan
The Company maintains a profit sharing plan covering eligible
salaried and nonunion employees. Contributions are made to the plan
at the discretion of the management of the Company. The Company
recorded expense of approximately $0, $178,000 and $165,000 in
fiscal 2001, 2000 and 1999, respectively.
F-35
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 11. Other Expenses, Net
Other expenses consist of the following for the fiscal years ended:
(In Thousands)
December 29, December 30, January 1,
2001 2000 2000
-------------------------------------------------------------------------------
Interest expense $ (1,352) $ (1,335) $ (1,563)
Interest income 204 190 192
-------------------------------------------------------------------------------
Interest, net (1,148) (1,145) (1,371)
Equity in income of affiliates 60 669 181
Foreign currency exchange gains/
(losses) 40 2 (874)
Legal settlement (763) -- --
Other 94 175 --
-------------------------------------------------------------------------------
$ (1,717) $ (299) $ (2,064)
===============================================================================
Note 12. Transactions with Affiliates
General made purchases of approximately $11.4 million, $26.7 million
and $23.8 million from its joint ventures and affiliates in fiscal
2001, 2000, and 1999, respectively.
From 1995 through May 2001, the Company and Gussack Realty Company
("Realty"), an entity owned by the principal stockholders of
General, were plaintiffs and counterclaim defendants in an action
against Xerox for contamination to real property owned by Realty and
previously leased by the Company from Realty. The action resulted in
a judgment against Xerox for $1,111,483 (including sanctions awarded
of $27,898) which, together with interest of $883,048 amounted to a
total recovery of $1,994,530. The jury rejected Xerox's counterclaim
in its entirety.
Inasmuch as the judgment against Xerox was expressly for damage to
Realty's property, and Realty expended $2.5 million in both the
prosecution of Realty's and the Company's claims, and defense of
Xerox's counterclaims against Realty and the Company, on May 29,
2001, the Company and Realty entered into an agreement whereby (i)
the Company waived any interest in the judgment, (ii) the Company
agreed to reimburse Realty $763,387 over the next four years with
interest at 8.4% per annum from the date of the agreement,
representing 30% of the litigation costs in the action and (iii)
Realty released the Company from any further claims for
indemnification for litigation expenses in connection with the
action. The reimbursement will be paid to Realty in the form of
additional rent payments by the Company of $18,780.17 per month for
48 months beginning in June, 2001. At December 29, 2001, the Company
has charged operations for the entire amount of the settlement and
has paid $131,000 toward this agreement.
The Company leases property from Realty. The Company entered into a
lease agreement with Realty for its new premises effective November
1, 1996 for an initial term of seven years. Rent and real estate
taxes paid to this affiliate totaled $1,242,000, $1,302,000 and
$1,189,000 in fiscal 2001, 2000, and 1999, respectively.
The amounts receivable from and payable to General-IKL Corp., a
corporate joint venture with a manufacturer located in the former
Republic of Yugoslavia, are restricted due to suspension, by the
United States government, of certain economic activity with that
country. The Company accrues interest on the balances due to and
from this affiliate.
F-36
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 13. Stock Options
In September 1996, General adopted the 1996 Stock Option and
Performance Award Plan ("1996 Plan"), which authorizes the granting
to directors, officers and key employees of General of incentive
or non-qualified stock options, performance shares, restricted
shares and performance units. The 1996 plan covers up to 500,000
shares of common stock.
The exercise price of any incentive stock option granted to an
eligible employee may not be less than 100% of the fair market value
of the shares underlying such option on the date of grant, unless
such employee owns more than 10% of the outstanding common stock or
stock of any subsidiary or parent of the Company, in which case the
exercise price of any incentive stock option may not be less than
110% of such fair market value. No option may be exercisable more
than ten years after the date of grant and, in the case of an
incentive stock option granted to an eligible employee owning more
than 10% of the common stock or stock of any subsidiary or parent of
the Company, no more than five years from its date of grant.
Options are not transferable, except upon the death of the optionee.
Upon death of an optionee, vested options are exercisable according
to the original term of the option grant. In general, upon
termination of employment of an optionee, all options granted to
such person which are not exercisable on the date of such
termination immediately expire, and any options that are exercisable
expire three months following termination of employment if such
termination is not the result of death or retirement and one year
following such termination if such termination was because of death,
retirement, disability or with the consent of General.
General estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in the year
ended December 29, 2001: no dividend yield, expected volatility of
54.0%, risk free interest rate of 5.0% and expected life of 10
years. For the year ended January 1, 2000, the weighted average
assumptions used for grants were: no dividend yield, expected
volatility of 45.8%, risk free interest rate of 5.0% and expected
life of 10 years. If compensation cost for General's stock option
plan had been determined in accordance with SFAS No. 123,
consolidated net income would have been reduced by approximately
$138,000 or $.03 per diluted share, $161,000 or $.04 per diluted
share, and $169,000 or $.04 per diluted share for the fiscal years
ended 2001, 2000, and 1999, respectively. The following table
summarizes information about General's stock options outstanding at
December 29, 2001:
Options Outstanding
-----------------------------------------------
Weighted Average Weighted
Number Remaining Contractual Average
Outstanding Life (Years) Price
-------------------------------------------------------------------
Exercise prices:
$3.75 to $3.80 95,000 9.4 $ 3.75
$7.00 to $7.70 242,800 4.5 7.16
===================================================================
F-37
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 13. Stock Options, (Continued)
Transactions under the stock option plan are summarized as follows:
December 29, December 30, January 1,
2001 2000 2000
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 245,300 $ 7.16 259,800 $ 7.15 269,550 $ 8.72
Granted 95,000 3.75 -- -- 5,000 7.63
Exercised -- -- -- -- (6,000) 7.00
Canceled (2,500) 7.00 (14,500) 7.00 (8,750) 7.00
-----------------------------------------------------------------------------------------------------------------
Outstanding at end year 337,800 6.20 245,300 7.16 259,800 7.15
=================================================================================================================
Options exercisable at year end 185,250 7.20 137,850 7.20 84,450 7.20
=================================================================================================================
Weighted average fair value of
options granted during the year $ 2.06 $ -- $ 4.30
=================================================================================================================
In addition, General has 90,000 warrants outstanding with an
exercise price of $9.80. These warrants expire in February 2002.
Note 14. Earnings per share
(In Thousands except shares and per share data)
Year Ended
------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
------------------------------------------
Net income available to common stockholders $ 638 $ 1,879 $ 2,244
------------------------------------------
Basic earnings per share computation:
Weighted Average Common shares Outstanding 4,108,993 4,109,565 4,112,453
------------------------------------------
Basic earnings per share .16 .46 .55
------------------------------------------
Diluted earnings per share computation:
Weighted Average Common shares Outstanding 4,108,993 4,109,565 4,112,453
Incremental shares from assumed exercise of
dilutive options -- -- 149
------------------------------------------
4,108,993 4,109,565 4,112,602
------------------------------------------
Diluted earnings per share $ .16 $ .46 $ .55
------------------------------------------
For the years ended December 29, 2001, December 30, 2000 and January
1, 2000, 427,800, 335,300 and 349,800 options and warrants
outstanding, respectively, were anti-dilutive.
F-38
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 15. Commitments, Contingencies and Other Comments
Operating Lease: The Company leases its premises from Realty.
----------------
The future minimum annual rentals under the lease with Realty are as
follows: (In Thousands)
--------------------------------------------------------------------
2002 $ 1,036
2003 1,098
2004 1,152
2005 1,164
2006 1,222
--------------------------------------------------------------------
$ 5,672
====================================================================
Rent expense was $1,026,000, $1,166,000 and $968,000 in fiscal 2001,
2000, and 1999, respectively.
Capital Leases:
---------------
The Company also leases certain equipment under capital leases. The
assets acquired under capital leases have a cost of $996,000 and
accumulated depreciation of $249,000 as of December 29, 2001.
Interest rates on the Company's capital leases range from 6.90% to
9.6425%.
The following is a schedule, by year, of approximate future minimum
lease payments under capitalized leases, together with the present
value of the net minimum lease payment at December 29, 2001. (In
Thousands)
--------------------------------------------------------------------
Payment for the year ending:
2002 $ 223
2003 242
2004 235
2005 50
2006 --
--------------------------------------------------------------------
Total minimum lease payments 750
Less: amount representing interest 87
--------------------------------------------------------------------
Present value of net minimum lease payments 663
Less: current portion 180
--------------------------------------------------------------------
Long-term lease obligation $ 483
====================================================================
General has a management consulting and non competition agreement
with a former officer and shareholder. The agreement, which
commenced as of January 1, 2000, provides for monthly payments
aggregating $55,000 per annum for ten years. As of December 29, 2001
future payments required under the agreement total $442,000.
F-39
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 15. Commitments, Contingencies and Other Comments, (Continued)
The Company advanced $1,750,000 plus incidental costs to WMG.
Pursuant to related shareholder agreements, the Company (a) owns 60%
of WMG (b) WMG assumed World's contractual obligation to invest $5.2
million in World Machinery Works over five years and agreed to
indemnify and hold the Company harmless as to such obligation. The
investment may be made in cash, machinery, equipment, services,
"know how", or any equivalent thereof in any combination. In the
event WMG does not make a scheduled investment in World Machinery
Works, it must pay the State Ownership Fund of Romania ("SOF") a
penalty equal to 30% of such amount not invested. The contract with
SOF provides for investment of $2,720,000 in 2002, of which $400,000
has already been paid.
Additionally, US Customs has a claim against the Company, which the
Company believes to be without merit. The Company intends to
vigorously defend this claim and believes that the claim will not
have a material impact on the financial condition, operations or
liquidity of the Company.
General is currently undergoing a New York State Sales and Use Tax
audit for the June 1996 - February 1999 periods. General believes
that the audit will not have a material impact on the financial
condition, operations or liquidity of the Company.
On February 13, 2002, the American Bearing Manufacturers Association
filed a petition ("ABMA Petition") on behalf of the U.S. ball
bearing industry with both the United States International Trade
Commission ("ITC") and United States Department of Commerce ("DOC")
seeking the imposition of antidumping duties on imports of ball
bearings from the People's Republic of China. In antidumping
proceedings generally, ITC conducts an investigation as to whether
sales of the imported products which are the subject of the petition
("Products") have caused or threatened material injury to the
subject U.S. industry ("Material Injury Investigation"). DOC
conducts a separate investigation to determine if the Products have
been sold in the U.S. at less than fair value, as determined by
Commerce based upon an estimate of the foreign market value of the
Product (i.e. the price at which the same or similar merchandise is
sold or offered for sale in the principal markets of the home market
country) ("Dumping Investigation") . If the ITC finds that the U.S.
industry has been or is threatened with material injury by sales of
the Product in the U.S. and Commerce finds that the Products have
been sold at less than fair value, Commerce enters an order imposing
duties on the unfairly traded Products equal to the percentage
difference between the selling prices in the U.S. and the foreign
market value ("Antidumping Order"). Exporters who are subject to the
Antidumping Order are required to post antidumping deposits with
U.S. Customs Service on each shipment of Product into the U.S. The
duty rates fixed in the Antidumping Order are subject to annual
review by Commerce.
Based on the ABMA Petition, the ITC has commenced its Material
Injury Investigation and Commerce has initiated its Dumping
Investigation. The Company and its joint ventures in the PRC believe
that they do not engage in dumping, will vigorously defend the
action, and expect that the proceeding will not have a material
impact on their operations. Nonetheless, adverse findings by ITC and
DOC could result in the imposition of antidumping duties on ball
bearings and parts thereof from NGBC, JGBR, WGBC and/or SPGBC for
sale in the U.S. by the Company.
JGBR is the guarantor of certain obligations of an unrelated third
party totaling $2,651,000 at December 29, 2001.
F-40
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 16. Segment and Geographic Information
The Company has adopted Statement of Financial Accounting Standards
No. 131 ("FAS 131"), Disclosures about Segments of an Enterprise and
Related Information. FAS 131 supersedes FAS 14, Financial Reporting
for Segments of a Business Enterprise replacing the "industry
segment" approach with the "management" approach. The management
approach designates the Internal reporting that is used by
management for making operating decisions and assessing performance
as the source of the Company's reportable segments.
During 2001, the Company redefined its operating segments to more
accurately reflect those used by management. Prior period
information has been restated.
The Company operates in two segments: Bearings, which manufactures
bearings and bearing components for OEMs and distributors; and
Machine Tools, which manufactures machine tools for dealers and
manufacturers.
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 operating income.
The following tables present information about the Company's
business segments and geographic data: (In Thousands)
2001
-----------------------------------------------------------------
Machine
Bearings Tools Total
-----------------------------------------------------------------
Net sales to External Customers $ 44,474 $ 11,179 $ 55,653
Gross profit 13,203 4,312 17,515
Operating income / (loss) 3,179 (278) 2,901
Depreciation/amortization 937 129 1,066
Capital expenditures 2,511 44 2,555
Total assets $ 63,871 $ 12,753 $ 76,624
-----------------------------------------------------------------
2000
-----------------------------------------------------------------
Machine
Bearings Tools Total
-----------------------------------------------------------------
Net sales to External Customers $50,270 $ 9,123 $59,393
Gross profit 15,549 2,927 18,476
Operating income 4,560 (2,699) 1,861
Depreciation/amortization 603 630 1,233
Capital expenditures 840 108 948
Total assets $41,031 $ 14,233 $55,264
-----------------------------------------------------------------
F-41
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 16. Segment and Geographic Information, (Continued)
1999
-----------------------------------------------------------------
Machine
Bearings Tools Total
-----------------------------------------------------------------
Net sales to External Customers $51,788 $12,550 $64,338
Gross profit 15,770 5,182 20,952
Operating income / (loss) 5,593 232 5,825
Depreciation/amortization 569 220 789
Capital expenditures 569 162 731
Total assets $36,127 $17,213 $53,340
-----------------------------------------------------------------
---------------------------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
---------------------------------------------------------------
Long lived Assets:
United States $ 3,593 $ 3,351 $ 2,968
Europe 5,083 5,292 5,878
Asia 13,373 -- --
---------------------------------------------------------------
Total $ 22,049 $ 8,643 $ 8,846
---------------------------------------------------------------
---------------------------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
---------------------------------------------------------------
Sales:
United States $ 45,967 $ 52,618 $ 54,706
Europe 7,772 4,251 7,572
Other 1,914 2,524 2,060
---------------------------------------------------------------
Total $ 55,653 $ 59,393 $ 64,338
---------------------------------------------------------------
In fiscal 2001, 2000 and 1999, the Company had one customer that
represented approximately 19%, 17% and 13% of total sales,
respectively. These sales are included in the Bearing segment.
F-42
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 17. Supplemental Cash Flow Information
The Company paid interest in the amount of $1,172,000 in fiscal
2001, $1,323,000 in fiscal 2000 and $1,502,000 in fiscal 1999, and
income taxes of $318,000, $1,415,000 and $1,352,000 in fiscal 2001,
2000 and 1999, respectively.
During fiscal 2001, the Company increased its equity interest in
NGBC and JGBR resulting in the consolidation of these entities. The
fair value of assets acquired at the date the Company increased its
equity interests was approximately $9,577,000 and the Company
assumed liabilities of approximately $4,450,000. Total cash paid in
these transactions was approximately $1,822,000 and the Company
issued debt amounting to approximately $3,305,000.
The Company distributed a note receivable from Realty, in the amount
of $1,594,000, to the former shareholders of World prior to the
acquisition described in Note 2.
During fiscal 2000, the Company had a non-cash financing activity of
$207,000 whereby options to purchase 50,000 shares previously issued
for services rendered were exercised. The option was previously
granted by World for the right to purchase from World 50,000 shares
that World held in General.
The Company entered into a lease for new equipment in 2000 in the
amount of $19,000.
During fiscal 1999, the Company negotiated a price reduction of
$200,000 on a previously capitalized fixed asset. This non-cash
transaction is not reflected in investing activities. There is a
corresponding offset to the previously recorded liability to the
parent in financing activities.
Also during fiscal 1999, the Company transferred a machine valued at
$300,000 as payment for additional investment in NGBC.
Note 18. Subsequent Events
In February 2002, General agreed to increase its investment in SGBC
to 50% and assumed control of the operations. In consideration for
this transaction, General contributed $1,000,000 in cash in 2002 and
will contribute $1,000,000 and $1,000,000 in 2003 and 2004,
respectively.
Note 19. Quarterly Financial Data (In Thousands except for per share data -
Unaudited)
------------------------------------------------------------------------
Basic Diluted
2001 Net Sales Gross Net Income Earnings Earnings
Profit Per Share Per Share
------------------------------------------------------------------------
First Qtr. $ 13,565 $4,559 $ 524 $ .13 $ .13
Second Qtr. 14,937 4,891 (29) (.01) (.01)
Third Qtr. 13,240 4,071 280 .07 .07
Fourth Qtr. 13,911 3,994 (137) (.03) (.03)
------------------------------------------------------------------------
F-43
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 19. Quarterly Financial Data (In Thousands except for per share data -
Unaudited), (Continued)
--------------------------------------------------------------------------
Gross Basic Diluted
2000 Net Sales Profit Net Income Earnings Earnings
Per Share Per Share
--------------------------------------------------------------------------
First Qtr. $ 18,450 $6,090 $ 1,569 $ .38 $ .38
Second Qtr. 16,343 5,416 865 .21 .21
Third Qtr. 14,602 4,974 594 .14 .14
Fourth Qtr. 9,998 1,996 (1,149) (.27) (.27)
--------------------------------------------------------------------------
Sales:
Second Quarter 2001: The increase is mainly due to 3 large machines
sold by WMG.
Third Quarter 2001: The sales volume decrease was mainly due to the
seasonality in the Bearing segment as well as the worsening economic
conditions in the Company's industrial markets.
Second Quarter 2000: There were no major variances in the Company's
core businesses compared to the first quarter. However, taken in the
aggregate, the sales volume decreased due to the strength of the
first quarter.
Third Quarter 2000: The sales volume decrease was mainly due to the
seasonality in the Bearing segment as well as the beginning of an
economic slowdown in the Company's industrial markets.
Fourth Quarter 2000: The sales volume decrease was primarily
attributable to worsening economic conditions in the Company's
industrial markets and adjustments at WMG related to a billing error
and the timing of sales recognition totaling $1,292,000 originally
recorded in prior quarters.
Net income:
Second Quarter 2001: The decrease in net income is primarily related
to a one time charge of $763,000 for an agreement reached between
the Company and Gussack Realty, allocating the proceeds and
litigation costs from the litigation with Xerox. The reimbursement
will be paid to Gussack Realty in the form of additional rent
payments by the Company of $18,780.17 per month for 48 months
beginning in June 2001.
Third Quarter 2001: The increase in net income is due to the one
time charge of $763,000 that the Company incurred in the second
quarter partially offset by the effect of the reduced sales volume
in the Bearing segment.
Fourth Quarter 2001: The decrease in net income is primarily due to
a $350,000 increase to the allowance for doubtful accounts in the
Bearing segment.
Second Quarter 2000: The decrease in net income was due to the
effect of the reduced sales volume coupled with a reduction in gross
margins in the Machine Tool segment.
Fourth Quarter 2000: The decrease in net income in the Bearing
segment was primarily due to the reduced sales volume coupled with a
reduction in gross margins including increased inventory provisions
($544,000). The decrease in the Machine Tool segment was mainly due
to the reduced sales volume and adjustments mentioned above as well
as increased operating expenses including a write-down of assets no
longer in use ($501,000).
F-44
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 20. Allowance for Doubtful Accounts
A summary of the changes in the Company's allowance for doubtful
accounts and the resulting charge to earnings for each of the three
years in the period ended December 29, 2001 are as follows:
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions (1) End of Period
----------- ------ -------- -------------- -------------
Year Ended January 1, 2000
Allowance for Doubtful Accounts $400 $460 (2) $122 $738
---- ---- ---- ----
$400 $460 $122 $738
==== ==== ==== ====
Year Ended December 30, 2000
Allowance for Doubtful Accounts $738 $280 $30 $988
---- ---- ---- ----
$738 $280 $30 $988
==== ==== ==== ====
Year Ended December 29, 2001
Allowance for Doubtful Accounts $988 $428 $542 $874
---- ---- ---- ----
$988 $428 $542 $874
==== ==== ==== ====
Note: (1) Uncollectible accounts written off net of recoveries.
(2) Acquisition of WMG results in addition to reserve totaling $418,000.
F-45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On December 19, 2001 General filed a Report on Form 8-K, dated December
12, 2001 containing the following:
(i) On December 12, 2001, the Company dismissed BDO Seidman, LLP ("BDO"),
who was previously engaged as the principal accountant to audit the Company's
financial statements. Going forward the Company will use the firm of Urbach Kahn
& Werlin, LLP ("UKW") as its principal independent accountant. Prior to its
engagement, UKW was not consulted by or on behalf of the Company regarding the
application of accounting principles to any specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements or as
to any matter which might have constituted a disagreement or reportable event
within the purview of Item 304 of Regulation S-K;
(ii) BDO's reports on the Company's financial statements for the past two
years did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles;
(iii) The decision to change accountants was recommended by the audit
committee of the board of directors and authorized by the board of directors;
(iv) During the two most recent fiscal years and the subsequent interim
period preceding the dismissal of BDO, there have been no disagreements between
the Company and BDO on any matter of accounting principles, practices, financial
statement disclosure, or auditing scope of procedure;
(v) None of the kinds of events listed in Item 304 (a)1(v) (A) through (D)
of Regulation S-K have occurred within the Company's two most recent fiscal
years and the subsequent interim period preceding the dismissal of BDO.
46
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Seymour I. Gussack.............78 Chairman of the Board of Directors
David L. Gussack...............45 President and Director
Robert E. Baruc................50 Director
Peter Barotz...................74 Director
Nina M. Gussack................46 Director
Barbara M. Henagan.............43 Director
Fred Groveman..................65 Director
Alistair G. Crannis............54 Vice President - Sales &
Marketing
Corby W. Self..................45 Vice President - Ball & Roller
Operation
William F. Kurtz...............44 Vice President - Director of
Operations
Joseph J. Hoo..................67 Vice President - Advanced
Technology and China Affairs
Barry A. Morris................47 Chief Financial Officer
John E. Stein, Esq.............45 Secretary & General Counsel
Set forth below is certain additional information with respect to the Directors,
and executive officers.
SEYMOUR I. GUSSACK founded the Company in 1958 and has served as Chairman
of the Board of Directors and a Director of General Bearing since its formation.
Seymour I. Gussack is also the Chairman of the Board of Directors and a Director
of World and a partner of Realty. See "Certain Relationships and Related
Transactions". Seymour I. Gussack's son is David L. Gussack, President of the
Company and a Director.
DAVID L. GUSSACK became President of the Company in 1993 and has been a
Director of the Company since 1987. David L. Gussack has held various positions
with the Company since 1979, including Executive Vice President from 1991 to
1992, General Manager of the OEM Division from 1988 to 1990, Supervisor and
Coordinator, Hyatt Absorption Project from 1987 to 1988, Plant Manager from 1986
to 1987, Office Facilities Manager from 1985 to 1986, and Manager of Special
Projects from 1983 to 1985. David L. Gussack is a Director of SGBC and NGBC. He
also is a Director of World and a partner of Realty. See "Certain Relationships
and Related Transactions." David L. Gussack is a graduate of the University of
Pennsylvania. David L. Gussack's father is Seymour I. Gussack, Chairman of the
Board of Directors of the Company.
ALISTAIR G. CRANNIS has served as Vice President - Sales & Marketing since
June 1999. Mr. Crannis was General Manager - OEM Division of the Company from
January 1997 to June 1999. Prior to joining the Company, Mr. Crannis served as
President of RHP Bearings, Inc., the U.S. Subsidiary of RHP Bearing Ltd. United
Kingdom. He holds a B.S. Industrial Engineering Degree from the University of
Hartfordshire in England.
WILLIAM F. KURTZ has served as Vice President - Director of Operations
since 1997. He served as Vice President - Technical Services of the Company from
1993 to 1997. Mr. Kurtz was Chief Engineer of the Company from 1989 to 1993 and
Senior Project Engineer of the Company from 1988 to 1989. He is a graduate of
Manhattan College (B.E. and M.E. in Mechanical Engineering) and a licensed
professional engineer.
JOSEPH J. HOO has served as Vice President - Advanced Technology and China
Affairs of the Company since August 1995. Mr. Hoo served as General Manager,
Industrial Products Division, from 1991 to 1995 and as Chief Metallurgist from
1987 to 1991. Mr. Hoo is a graduate of the National University of Japan (B.S. in
Engineering) and University of Michigan (M.S.E. in Metallurgy and Engineering).
BARRY A. MORRIS was appointed Chief Financial Officer of the Company in
July 1998. Prior to joining the Company, Mr. Morris served as Director of
Financial Services at the U.S. headquarters of BTR, plc, United Kingdom. He
holds a Master of Business Administration from the University of Connecticut and
a B.S. in Accounting from American International College.
47
CORBY W. SELF has served as Vice President - Ball & Roller Operations
since January 2002. Prior to his appointment, Mr. Self spent eleven years at NN
Inc., a manufacturer of precision steel balls and rollers. There he progressed
from Quality Management to Operations Management, with full responsibility for
four plants. His early experience included quality management positions with
Eaton Corporation and CMI Corporation. Mr. Self obtained a BS in Computer
Science / Management from Johnson and Wales University in 1984.
JOHN E. STEIN has served as Secretary and General Counsel since July 1998.
From February 1997 to June 1998, he served as General Counsel. From April 1995
to January 1997, Mr. Stein served as Staff Counsel to the Company. Mr. Stein is
a graduate of the State University of New York, Purchase, (B.A. in Philosophy)
and Brooklyn Law School (J.D.). He is a member of the bars of New York, New
Jersey and District of Columbia.
ROBERT E. BARUC has been a Director of the Company since February 1997.
From January 1999 to December 2000, Mr. Baruc was Co-President of Unapix
Entertainment, Inc., an independent distributor of film and television
programming. From April 1994 to December 1998, Mr. Baruc was an Executive Vice
President of Unapix Entertainment, Inc. From September 1999 to December 2000, he
was the Chief Executive Officer of A-Pix Entertainment, Inc. From August 1993 to
August 1999, he was the President and Chief Executive Officer of A-Pix
Entertainment, Inc. From December 1992 to August 1993, Mr. Baruc was President
of Triboro Entertainment Group, a company engaged principally in home video
distribution. From January 1991 to December 1992, Mr. Baruc primarily acted as
an independent consultant to the entertainment industry. He is the son-in-law of
Seymour I. Gussack and the brother-in-law of David L. Gussack and Nina M.
Gussack.
PETER BAROTZ has been a Director of the Company since December 30, 1997.
For the past 25 years, Mr. Barotz has been the President of Panda Capital
Corporation.
NINA M. GUSSACK has been a Director of the Company since February 1997.
Ms. Gussack has been litigation partner at the law firm of Pepper Hamilton LLP
in Philadelphia, Pennsylvania since 1987. She is a graduate of the University of
Pennsylvania (B.S. in History and M.S. in Secondary Education) and Villanova
University School of Law (J.D.). She is a member of the Pennsylvania bar. She is
the daughter of Seymour I. Gussack and the sister of David L. Gussack.
BARBARA M. HENAGAN was elected a Director of the Company on March 30,
1999. Ms. Henagan is presently Managing Director of Linx Partners. Previously
Ms. Henagan was Senior Managing Director of Bradford Ventures Ltd. She is also a
Director of Hampton Industries, V-Span, Inc. and Batteries Batteries, Inc. Ms.
Henagan is a graduate of Princeton University and Columbia University's MBA
program.
FRED GROVEMAN was elected a Director of the Company on April 4, 2002. Mr.
Groveman, a CPA, is currently a partner in FB & Co., LLP Financial Advisors and
Consultants, located in New York City. From 1958 to 1998 Mr. Groveman was
associated with Ferro Berdon & Co., CPA's and Consultants and was the Managing
Partner of that firm for over 20 years.
Directors hold office until the next annual meeting of stockholders
following their election, or until their successors are elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
The standing committees of the Board of Directors are the Audit Committee,
the Compensation/ Stock Option Committee and the Insider Trading Compliance
Committee.
The Audit Committee of the Board of Directors consists of three directors,
Peter Barotz, Fred Groveman and Barbara M. Henagan. Based on its charter, the
Audit Committee is to review the outside auditor designated by management and
render to the Board any of the Committee's comments and/or recommendations
relating to such auditor; meet with the outside auditor at least once per year
to discuss any issues raised by the auditor and report back to the Board for its
consideration; hold at least one meeting per year; submit the minutes of all
meetings of the Audit Committee to, or discuss matters discussed at each meeting
with the Board; ensure receipt from the outside auditor of a formal written
statement delineating all relationships between the auditor and the Company,
consistent with Independence Standards Board Standard 1; actively engage in a
dialogue with the outside auditor with respect to any disclosed relationships or
services that may impact the objectivity and independence of the auditor; take,
or recommend that the Board take, appropriate action to oversee the independence
of the outside auditor; and review and assess the adequacy of the Audit
Committee charter on an annual basis.
48
The Compensation/Stock Option Committee consists of Messrs. Peter Barotz
and Robert E. Baruc, the former of whom is an independent Director. The
Compensation/Stock Option Committee's function is to review and approve annual
salaries and bonuses for all employees with salaries in excess of $100,000 and
review, approve and recommend to the Board of Directors the terms and conditions
of all employee benefit plans or changes thereto, including the granting of
stock options pursuant to the Company's 1996 Option Plan.
The Insider Trading Compliance Committee ("Compliance Committee") consists of
the Insider Trading Compliance Officer (currently the Company's Secretary &
General Counsel) and the directors who are members of the Audit Committee. The
Compliance Committee reviews and either approves or prohibits all proposed stock
trades by key insiders in accordance with the Company's Procedures and
Guidelines Governing Insider Trading and Tipping.
Item 11. Executive Compensation
The following table sets forth the aggregate compensation paid for
services rendered in all capacities to the Company's most highly compensated
executive officers during the fiscal year ended December 29, 2001:
ANNUAL
COMPENSATION(1) LONG-TERM COMPENSATION
- --------------------------------------------------------------------------------------------------------
Restricted
Name and Fiscal Salary Bonus Stock Stock All Other
Principal Position Year $ $ Awards Options# Compensation
- --------------------------------------------------------------------------------------------------------
David L. Gussack, President 2001 315,495 75,287 -- 20,000 5,620 (3)
2000 307,789 62,213 -- -- 25,000 (4)
1999 221,927 75,133 -- 20,000 (2) --
Alistair G. Crannis, VP Sales 2001 147,231 7,133 -- 5,000 --
& Marketing 2000 143,635 13,825 -- -- --
1999 133,356 19,401 -- 10,000 (2) --
Barry A. Morris, Chief Financial 2001 126,198 6,115 -- 5,000 --
Officer 2000 123,116 11,850 -- -- --
1999 120,000 18,462 -- 10,000 (2) --
Joseph J. Hoo, V.P. Advanced 2001 131,456 6,370 -- 5,000 --
Technology & China Affairs 2000 128,281 12,345 -- -- --
1999 118,680 16,604 -- 5,000 (2) --
William F. Kurtz, V.P. Director 2001 112,304 5,442 -- 5,000 --
of Operations 2000 104,817 12,078 -- -- --
1999 101,694 15,341 -- 5,000 (2) --
49
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
- ----------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at at December 29, 2001
December 29, 2001
---------------------------------------------
Name Shares Acquired on Value Realized Exercisable/ Exercisable/
Exercise $ Unexercisable Unexercisable
#
- ----------------------------------------------------------------------------------------------------------
David L Gussack 0 0 60,000 / 25,000 N/A
Alistair G. Crannis 0 0 6,000 / 9,000 N/A
Barry A. Morris 0 0 7,500 / 7,500 N/A
Joseph J. Hoo 0 0 13,500 / 11,500 N/A
William F. Kurtz 0 0 9,800 / 10,000 N/A
Compensation of Directors
Standard Arrangements:
All fees described herein are for non-management directors only.
a. Attendance fee - $1,000 for actual physical attendance or $500 if
attendance is by telephone.
b. Committee fee - $500 fee per director unless the committee meets
immediately before or after a board meeting in which case the fee
will be $250. Fees will be halved for telephone attendance.
c. Stock grant - 2,000 shares per director per year will be issued at
calendar year end for the year served. The intent of this specific
quantity is to approximate $12,000 - $15,000 in value. It may be
changed annually to reflect this goal.
d. Each member of the board shall receive an option for 5,000 shares
(at the then market price) when joining the board.
Other Arrangements (1):
In 2001, Seymour I. Gussack, Chairman of the Board of Directors, received
salary of $247,138, bonus of $71,975, other compensation of $5,620 (3) and was
granted 20,000 stock options. In 2002, he will receive salary and bonus as
approved by the Compensation/Stock Option Committee of the Board of Directors.
(1) Perquisites and other personal benefits are not included because they do
not exceed the lesser of $50,000 or 10% of the total base salary and
annual bonus for the named executive officer.
(2) Repricing.
(3) Board compensation: 2,000 shares at $2.81 per share, issued in 2002.
(4) Board compensation: 4,000 shares at $6.25 per share, issued in 2001 (2,000
shares earned in 1999 & 2,000 shares earned in 2000).
50
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of the date of this Report, certain
information concerning the beneficial ownership of Common Stock as to each
director and current executive officer of the Company, and each person who, to
the Company's knowledge, beneficially owns more than 5% of the outstanding
Common Stock.
NUMBER OF
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF SHARES
BENEFICIAL OWNER OWNED (1) BENEFICIALLY OWNED (1)
- ---------------- ------------ ----------------------
David L. Gussack 726,250 (2,3) 17.4%
Estate of Harold Geneen 615,284 15.2%
Nina M. Gussack 617,472 (2,4) 15.2%
Seymour I. Gussack 345,186 (2,5) 8.5%
Amy Gussack 380,970 (2,6) 9.4%
Robert E. Baruc 360,578 (2,7) 8.9%
Joseph Hoo 80,829 (8) 2.0%
William F. Kurtz 13,250 (9) *
Barry A. Morris 9,750 (10) *
Peter Barotz 9,000 (11) *
Alistair Crannis 9,250 (12) *
Barbara Henagan 9,750 (13) *
All Directors and Executive
Officers as a Group 2,539,035 61.5%
* Less than 1%
(1) Pursuant to Rule 13d-3 under the U.S. Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or shared
investment power (including the power to dispose or direct the disposition) with
respect to a security whether through a contract, arrangement, understanding,
relationship or otherwise.
(2) Includes 5,000 shares of Common Stock owned by Realty over which Seymour I.
Gussack, David L. Gussack, Nina M. Gussack, Amy Gussack and Robert Baruc,
through his spouse Faith Gussack, as general partners of Realty, may be deemed
to share the power to vote and dispose of. Each disclaims beneficial ownership
of the shares of Common Stock owned by Realty.
(3) Includes 13,080 shares owned by his spouse, 4,076 shares owned by his
spouse's daughter, over which his spouse has voting power, 8,978 shares owned by
his daughter, over which he has voting power, and 125,000 vested options as of
June 30, 2002.
(4) Includes 13,280 shares owned by her spouse, 9,752 shares owned by her
children over which she has voting power, and 5,000 vested options as of June
30, 2002.
(5) Includes 5,000 vested options as of June 30, 2002.
(6) Includes 13,080 shares owned by her spouse.
51
(7) Includes 304,664 shares owned by his spouse, 22,032 shares owned by his
children over which he has voting power, and 5,000 vested options as of June 30,
2002.
(8) Includes 17,250 vested options as of June 30, 2002.
(9) Includes 13,050 vested options as of June 30, 2002.
(10) Includes 8,750 vested options as of June 30, 2002.
(11) Includes 5,000 vested options as of June 30, 2002.
(12) Includes 9,250 vested options as of June 30, 2002.
(13) Includes 3,750 vested options as of June 30, 2002.
Item 13. Certain Relationships and Related Transactions
ACQUISITION OF WORLD
In July 2000, General Bearing Corporation ("General"), acquired 100% of
World Machinery Company ("World"), which, prior to the acquisition, owned 74.8%
of the outstanding common stock of General. World was principally owned by
members of General's Board of Directors and senior management. World's principal
business is the manufacture and sale of machine tools, however, it also holds
two bearing joint ventures for General's benefit. This combination has been
accounted for in a manner similar to a pooling of interests. Prior periods have
been restated as if the companies have always been combined. In consideration
for this transaction, General issued 3,140,000 shares of its common stock, $.01
per share par value. 2,950,000 shares of General's common stock, owned by World,
are now carried as treasury stock. Net shares issued (190,000) for the
acquisition are considered outstanding for all periods presented.
In the acquisition transaction the following individuals, all former
shareholders of World, received the number of restricted shares of Company
common stock indicated:
Name & Relationship to Registrant Number of Shares
- -------------------------------------------------------------------------------------------
Seymour Gussack, Chairman of the Board 393,786
David Gussack, President, Director 597,850
Includes 11,280 shares received by spouse, 7,178 shares received
by child and 6,152 shares received by spouse's children
Nina Gussack, Director 590,672
Includes 11,280 shares received by spouse and 6,152 shares
received by children
Amy Gussack, Daughter of Seymour Gussack & Sibling of 369,170
David Gussack and Nina Gussack
Includes 11,280 shares received by spouse
Faith Gussack, Daughter of Seymour Gussack , Sibling of 333,278
David Gussack and Nina Gussack and Spouse of Robert Baruc, who is
a Director. Includes 15,382 shares received by spouse and 17,432
shares received by children
Lisa Gussack, Daughter of Seymour Gussack , Sibling of 176,481
David Gussack and Nina Gussack
Includes 7,178 shares received by spouse and 22,560 shares received
by children.
52
LEASES WITH REALTY
The Company leases a facility located at West Nyack, New York comprising
189,833 square feet owned by Realty, whose partners include Seymour I. Gussack,
David L. Gussack and Nina M. Gussack, each a member of the Board of Directors of
the Company. The Company and Realty entered into the Lease effective November 1,
1996, which provides for an initial term expiring on October 31, 2003, renewable
at the option of the Company for an additional six year term. The Company
initially paid rent of $4.81 per square foot (or $913,000) annually, payable in
monthly rent payments of $76,000. The Lease provides for an increase every other
year to the greater of: (i) 106% of the preceding year's rent; or (ii) the
preceding year's rent multiplied by a fraction, the numerator of which is the
CPI for the area including Rockland County or if no such index is published, for
Northern New Jersey in effect 90 days prior to November 1 of the new rent year,
and the denominator of which is the CPI in effect 90 days prior to November 1 of
the preceding year. The November 1998 increase amounted to 6% of the preceding
year, resulting in rent of $5.0986 per square foot (or $968,000) annually
effective through October 31, 2000. The November 2000 increase also amounted to
6% of the preceding year, resulting in rent of $5.4045 per square foot (or
$1,026,000) annually effective through October 31, 2002.
TAX SHARING AGREEMENT
General has been included in the consolidated federal income tax returns
filed by World during all periods in which it has been a wholly-owned subsidiary
of World ("Affiliation Years"). Upon the completion of the IPO, General ceased
to be included in the consolidated federal income tax returns filed by World,
and has filed on a separate basis. As a result, General and World have entered
into an agreement ("Tax Sharing Agreement") providing for the manner of
determining payments with respect to federal income tax liabilities and benefits
arising during the Affiliation Years. Under the Tax Sharing Agreement, General
has paid to World an amount equal to General's share of World's consolidated
federal income tax liability, generally determined on a separate return basis,
for the tax years which have ended and the portion of the tax year preceding
consummation of the IPO, and World will pay General for the use of General's
losses, and credits arising in such periods, in each case net of any amounts
theretofore paid or credited by World or General to the other with respect
thereto. Effective with the acquisition of World by General, the Company will
file a consolidated Federal income tax return.
XEROX SETTLEMENT
From 1995 through May 2001, the Company and Gussack Realty Company
("Realty") were plaintiffs and counterclaim defendants in an action against
Xerox for contamination to real property owned by Realty and previously leased
by the Company from Realty. The action resulted in a judgment against Xerox for
$1,111,483 (including sanctions awarded of $27,898) which, together with
interest of $883,048 amounted to a total recovery of $1,994,530. The jury
rejected Xerox's counterclaim in its entirety.
Inasmuch as the judgment against Xerox was expressly for damage to
Realty's property, and Realty expended $2.5 million in both the prosecution of
Realty's and the Company's claims, and defense of Xerox's counterclaims against
Realty and the Company, on May 29, 2001, the Company and Realty entered into an
agreement whereby (i) the Company waived any interest in the judgment, (ii) the
Company agreed to reimburse Realty $763,387 over the next four years with
interest at 8.4% per annum from the date of the agreement, representing 30% of
the litigation costs in the action and (iii) Realty released the Company from
any further claims for indemnification for litigation expenses in connection
with the action. The reimbursement will be paid to Realty in the form of
additional rent payments by the Company of $18,780.17 per month for 48 months
beginning in June, 2001. At December 29, 2001, the Company has charged
operations for the entire amount of the settlement and has paid $131,000 toward
this agreement.
53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements (included in Part II of this report):
Report of Independent Certified Public Accountants dated April 10,
2002.
Report of Independent Certified Public Accountants dated April 25,
2001.
Report of Independent Certified Public Accountants dated February 8,
2001
Consolidated Balance Sheets for years ended December 30, 2000 and
December 29, 2001.
Consolidated Statements of Operations for years ended January 1,
2000, December 30, 2000 and December 29, 2001.
Consolidated Statement of Changes in Stockholders' Equity at January
2, 1999, January 1, 2000, December 30, 2000 and December 29, 2001.
Consolidated Statement of Cash Flows for years ended January 1,
2000, December 30, 2000 and December 29, 2001.
Summary of Significant Accounting Policies and Notes to Consolidated
Financial Statements.
(a) 2. Exhibits:
Reference is made to the Exhibit Index commencing on page 54, filed
pursuant to Item 14(c).
(b) Reports on Form 8-K:
On December 19, 2001, General filed a Report on Form 8-K, dated
December 12, 2001, reporting the dismissal of BDO as the Company's
principal independent certified public accountant, and the
engagement of UKW.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
12, 2002.
GENERAL BEARING CORPORATION
By: /s/ David L. Gussack
--------------------
David L. Gussack, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities indicated, on April 12, 2002.
Signatures Title Date
---------- ----- ----
/s/ Seymour I. Gussack Chairman of the Board of April 12, 2002
- --------------------------- Directors
Seymour I. Gussack
/s/ David L. Gussack President and Director April 12, 2002
- --------------------------- (Principal Executive Officer)
David L. Gussack
/s/ Barry A. Morris Chief Financial Officer April 12, 2002
- ---------------------------
Barry A. Morris
/s/ Barbara M. Henagan Director April 12, 2002
- ---------------------------
Barbara M. Henagan
/s/ Nina M. Gussack Director April 12, 2002
- ---------------------------
Nina M. Gussack
/s/ Peter Barotz Director April 12, 2002
- ---------------------------
Peter Barotz
/s/ Robert E. Baruc Director April 12, 2002
- ---------------------------
Robert E. Baruc
/s/ Fred Groveman Director April 12, 2002
- ---------------------------
Fred Groveman
55
EXHIBIT INDEX
NOTE: Except as to those items marked with an "*", which are filed herewith, all
Exhibits have been previously filed with the Company's Registration Statement on
Form S-1 effective February 7, 1997 (Registration No. 333-15477), or the
Company's Annual Report on Form 10-K for fiscal years 1996, 1997, 1998, 1999 and
2000.
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Agreement and Plan of Merger
3.1 Second Restated Certificate of Incorporation
3.2 By-Laws of the Company
4.1 Specimen Stock Certificate
4.1 Registration Rights Agreement
10.2 Contract dated June 1988 by and between Shanghai Rolling
Bearing Factory and the Company, including Agreement for the
Revision and Amendment to the Contract
10.3 Lease Agreement dated November 1, 1996 by and between Gussack
Realty Company and the Company relating to West Nyack, New
York premises
10.5 Sublease Agreement dated November 1, 1996 between the Company
and World Machinery Company
10.6 Sublease Agreement dated November 1, 1996 between the Company
and WMW Machinery Co.
10.9 1996 Stock Option and Performance Award Plan
10.10 Form of Representative's Warrant
10.11 Form of Registration Rights Agreement between the Company and
World (previously filed exhibit as 4.2)
10.12 Form of Tax Sharing and Indemnification Agreement between the
Company and World Machinery Company
56
10.19 Board Member Compensation Plan
10.20 Credit Agreement dated December 20, 1999 between KeyBank
National Association and the Company
21 List of Subsidiaries of the Company
57