<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended July 2, 1994
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Commission file number 1-5881
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 050113140
-------- ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island 02852
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(Address of principal executive offices and zip code)
(401) 886-2000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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: Yes x No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date; 4,651,952 Class A common
shares, 541,463 Class B common shares, par value $1, outstanding as of July
2, 1994.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF INCOME (LOSS)
---------------------------------------
(Dollars in Thousands Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended For the Half-Year Ended
------------------------ ------------------------
July 2, June 26, July 2, June 26,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $43,152 $40,003 $79,811 $79,761
Cost of goods sold 29,397 26,521 55,337 54,969
Selling, general and
administrative expense 13,610 12,179 25,871 22,923
------- ------- ------- -------
Operating profit (loss) 145 1,303 (1,397) 1,869
Interest expense (1,443) (1,329) (2,723) (2,461)
Other income, net 130 241 178 2,035
------- ------- ------- -------
Income (loss) before
income taxes (1,168) 215 (3,942) 1,443
Income tax provision 200 -- 300 --
------- ------- ------- -------
Net income (loss) $(1,368) $ 215 $(4,242) $ 1,443
======= ======= ======= =======
Primary and fully diluted
income (loss) per common
share $(.26) $.04 $(.83) $.29
======= ======= ======= =======
Weighted average shares
outstanding during
the period 5,191,299 4,971,148 5,114,403 4,968,758
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 2, 1994 December 25,1993
------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,283 $ 2,094
Restricted cash 6,147 6,078
Accounts receivable, net of allowances for
doubtful accounts of $2,625 and $1,320 42,724 44,525
Inventories 59,844 53,963
Prepaid expenses and other current assets 4,233 3,031
-------- --------
Total current assets 115,231 109,691
Property, plant and equipment:
Land 6,679 6,398
Buildings and improvements 34,052 32,315
Machinery and equipment 86,082 77,053
-------- --------
126,813 115,766
Less-accumulated depreciation 81,114 72,212
-------- --------
45,699 43,554
Other assets 13,146 12,626
-------- --------
$174,076 $165,871
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable and current
installments of long-term debt $ 38,859 $ 31,804
Accounts payable 12,351 12,716
Accrued expenses and income taxes 20,754 19,146
-------- --------
Total current liabilities 71,964 63,666
Long-term debt 33,806 32,696
Deferred income taxes 1,891 1,763
Unfunded accrued pension cost 4,724 4,226
Shareowners' Equity:
Preferred stock, $1 par value;
authorized 1,000,000 shares -- --
Common stock:
Class A, par value $1; authorized 15,000,000
shares; issued 4,659,444 shares in 1994
and 4,431,890 shares in 1993 4,659 4,432
Class B, par value $1; authorized 2,000,000
shares; issued and outstanding 541,463 shares
in 1994 and 547,604 shares in 1993 541 548
Additional paid in capital 46,999 45,710
Earnings employed in the business 135 4,377
Cumulative foreign currency translation
adjustment 10,176 9,394
Treasury stock: 7,492 shares in 1994 and 8,076
in 1993 at cost (151) (163)
Unearned compensation (668) (778)
-------- --------
Total shareowners' equity 61,691 63,520
-------- --------
$174,076 $165,871
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Half Year Ended
-----------------------
July 2, 1994 June 26, 1993
------------ -------------
<S> <C> <C>
Cash Provided by (Used in) Operations:
Net income (loss) $(4,242) $ 1,599
Adjustment for Noncash Items:
Depreciation and amortization 2,884 3,082
Pension credits and charges 224 150
Deferred income taxes 100 (500)
Gain on sale of operations -- (2,182)
Changes in Working Capital:
Accounts receivable 3,717 (4,715)
Inventories 1,106 (421)
Prepaid expenses and other current assets (457) (1,353)
Accounts payable and accrued expenses (3,991) 4,311
------- -------
Cash Provided by (Used in) Operations (659) (29)
------- -------
Investment Transactions:
Capital expenditures (1,363) (1,971)
Proceeds from sale of operations -- 8,700
Cash equivalent pledged (69) (3,000)
Other investing activities (213) 62
------- -------
Cash Provided by (Used in)
Investment Transactions (1,645) 3,791
------- -------
Financing Transactions:
Increase in long-term and short-term debt 4,902 1,081
Payment of long-term and short-term debt (2,276) (2,535)
Other financing activities 395 --
------- -------
Cash Provided by (Used in) Financing Transactions 3,021 (1,454)
------- -------
Effect of Exchange Rate Changes on Cash (528) (29)
------- -------
Cash and Cash Equivalents:
Increase (decrease) during the period 189 2,279
Beginning balance 2,094 4,640
------- -------
Ending balance $ 2,283 $ 6,919
======= =======
Supplementary Cash Flow Information:
Interest paid $ 2,547 $ 1,906
======= =======
Taxes paid $ 730 $ 769
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in Thousands)
1. Financial statements for interim periods are unaudited and include all
adjustments which are of a normal recurring nature which, in the opinion of
management, are necessary for a fair statement of the results for the
interim periods.
2. The Company operates and reports with its accounting year ending on the
last Saturday of the calendar year. Thus, most years encompass 52 weeks
with an occasional year encompassing 53 weeks. This results in most
accounting quarters of 13 weeks with one quarter in the 53 week year
including 14 weeks. The year 1994 will include 53 weeks and the first
quarter and first half of 1994 include 14 weeks and 27 weeks, respectively.
This compares to 1993 having 13 weeks in each quarter and 52 weeks in the
year.
3. During the first quarter of 1994, the Company changed its method of
accounting from the completed contract method to the percentage-of-
completion accounting method for its large machinery construction contracts
for its European operations. This conforms the worldwide accounting to the
U.S. reporting percentage-of-completion basis. Management believes that
this method more appropriately reports revenue and costs in related
accounting periods rather than recognizing substantially all revenue and
cost at the time of shipment. Information with respect to the quarter and
half year ended June 26, 1993 and the year ended December 25, 1993 has been
restated to reflect this change in accounting. The effect of this
restatement was to increase retained earnings at December 25, 1993 by $294.
Net income for the second quarter and half year of 1994 was reduced by $573
($.11 per share) and $409 ($.08 per share), respectively, and net income in
the second quarter and first half of 1993 was increased by $143 ($.03 per
share) and reduced by $156 ($.03 per share), respectively.
4. Income taxes include provisions for federal, foreign and state income taxes
and is based on the Company's estimate of effective income tax rates for
the full year. The current tax provision for the first half of 1994 is
$300. The tax provision for the first half of 1993 was $500 which was
offset by a $500 due to reductions in deferred tax liabilities as a result
of losses in certain of the Company's European subsidiaries.
5. Earnings (loss) per share is based upon the weighted average number of
common shares outstanding for the periods presented since inclusion of
common stock equivalents would be antidilutive. Fully diluted earnings per
share are not materially different.
6. Certain information in 1993 has been reclassified to conform to the 1994
presentation.
7. Brown & Sharpe Manufacturing Company through its subsidiary Brown & Sharpe
International Capital Corporation purchased, on March 24, 1994, the stock
of the French company Ets. Pierre Roch, S.A. (Roch) and its German sister
company, Mauser Prazisions - Messmittel GmbH, which together manufacture
and market micrometers, calipers, height gages, digital indicators, and
other similar precision measuring instrument products. The business is
headquartered in Luneville, France which is its sole manufacturing site.
The German operation is a sales office. These operations were purchased
from Diehl GmbH & Co. of Nurnberg, Germany ("Diehl"). The Company intends
to continue using the acquired assets in businesses in which they have been
previously employed.
The purchase price was delivery to Diehl of 175,000 shares of Brown &
Sharpe Class A Common Stock, subject to certain post closing adjustments
and granting Diehl the right to receive additional 50,000 shares of such
stock in the event the Company's Class A Common Stock
<PAGE>
attains a market price of $15 or more per share for a total of 30 days or
more during any twelve month period within the five years following the
purchase. The purchase price was determined through negotiation by the
parties subject to adjustment based on specified closing balance sheet
changes. Roch entered into a nine year lease agreement to lease the
Luneville facility from Societe Immobiliere Lunevilloise S.A.R.L., a
subsidiary of Diehl, for about $34,000 annually and has options to purchase
the facility during the lease term at the unamortized value remaining on
the lease.
The acquisition has been accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to
assets acquired and liabilities assumed based on an estimate of their fair
values at the date of acquisition. The book value of the net assets
exceeded the purchase price before allocation by approximately $2,100. The
estimated fair values of assets and liabilities after allocation are
summarized as follows:
<TABLE>
<S> <C>
Cash $1,408,000
Accounts receivable 2,552,000
Inventory 3,398,000
Machinery and equipment 726,000
Accounts payable and accruals 3,175,000
Short-term debt 867,000
Long-term debt 1,250,000
Pensions 516,000
</TABLE>
The Company's unaudited combined results of operations for the half year
ended July 2, 1994 and the year ended December 25, 1993 on a pro forma
basis assuming the acquisition of Roch occurred at the beginning of 1994
and 1993, respectively are as follows:
<TABLE>
<CAPTION>
First
Half Year Year
1994 1993
---------- ---------
<S> <C> <C>
Net sales $82,706 $167,323
Net (loss) $(4,147) $ (2,004)
Primary and fully diluted (loss) per common share $ (.81) $ (.39)
</TABLE>
8. On June 27, 1994, Brown & Sharpe Manufacturing Company ("Brown & Sharpe" or
the "Company") and Finmeccanica S.p.A. ("Finmeccanica") announced that they
have signed a definitive Acquisition Agreement providing for the
combination of the DEA metrology business of Finmeccanica (the "DEA Group")
with the Brown & Sharpe Measuring Systems Division. The DEA Group,
headquartered in Turin, Italy, manufactures and markets worldwide a variety
of types of coordinate measuring machines and systems ("CMM's") with 1993
worldwide sales and operating profit of approximately $110 million and $5.4
million, respectively. The transaction will expand the Company's combined
business line of CMM products, strengthen its CMM distribution capability
worldwide, augment its R&D capability, and provide for other benefits.
The transaction will be accomplished by Brown & Sharpe acquiring from
Finmeccanica all of the capital stock of DEA S.p.A., which owns the various
companies, business units and assets comprising the DEA Group, in exchange
for 3,450,000 shares of Brown & Sharpe's Class A Common Stock. At the
closing date, DEA will have debt of about $13.8 million. The purchase
price is subject to a post-closing adjustment pursuant to an adjustment
formula based upon a comparison of the adjusted net asset value (as
defined) of DEA and its subsidiaries at June 30, 1993 and the adjusted net
asset value as of July 31, 1994 (as defined and calculated in accordance
with a formula), and after reflecting certain specified adjustments in the
Acquisition Agreement.
<PAGE>
In connection with this transaction, Brown & Sharpe and Finmeccanica will
enter into a Shareholders Agreement that, among other things, provides that
Finmeccanica will not sell its shares of Brown & Sharpe for two years, and
thereafter only after first offering Brown & Sharpe the right to purchase
such shares (except for specified sales). In addition, Finmeccanica is
prohibited from acquiring any additional Brown & Sharpe shares until
December 31, 1998 (or earlier under certain circumstances) other than to
maintain its percentage of ownership of the outstanding capital stock of
Brown & Sharpe at approximately 40%. With respect to governance, Brown &
Sharpe has agreed to increase the total number of directors from seven to
ten and nominate three persons selected by Finmeccanica so long as
Finmeccanica owns at least 1,250,000 shares of the Company's stock.
The transaction has been approved by the Board of Directors of each party.
The statutory waiting period with respect to the proposed transaction under
the Hart-Scott-Rodino Antitrust Improvements Act has expired
through early termination by the pre-merger offer of the Federal Trade
Commission. Completion of the transaction is subject to, among other
things, receiving relevant governmental approvals in applicable countries,
obtaining financing arrangements which are satisfactory to Brown & Sharpe,
and approval by the Brown & Sharpe shareholders. Financing arrangements
anticipated by the Company include completion of an $8.5 million, five-year
mortgage loan secured by North Kingstown, Rhode Island facility, obtaining
$25.0 million of three-year unsecured term loans, which are presently being
negotiated with two banks, and guaranteed by Finmeccanica, and replacing
the present $15.0 million revolving credit facility with a $25.0 million
revolving credit facility. The Company expects to schedule a special
shareholders meeting and complete the transaction in September; however,
there can be no assurances that the conditions to the consummation of the
contemplated transaction pursuant to the Acquisition Agreement will be
satisfied.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
The following table sets forth the percentage of net sales of Brown &
Sharpe represented by the components of income and expense for the quarters and
half years ended July 2, 1994 and June 26, 1993:
<TABLE>
<CAPTION>
Quarter Ended Half-Year Ended
------------------ ------------------
July 2 June 26 July 2 June 26
1994 1993 1994 1993
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.1 66.3 69.3 69.0
Selling, general and
administrative expense 31.6 30.4 32.5 28.7
----- ---- ----- ----
Operating profit (loss) .3 3.3 (1.8) 2.3
Interest expense 3.3 3.3 3.3 3.1
Other income, net .3 .5 .2 2.6
----- ---- ----- ----
Income (loss) before
income taxes (2.7) .5 (4.9) 1.8
Income tax provision
(benefit) .5 -- .4 --
----- ---- ----- ----
Net income (loss) (3.2) .5 (5.3) 1.8
===== ==== ===== ====
</TABLE>
RESULTS OF OPERATIONS
(Quarter Ended July 2, 1994 compared to Quarter Ended June 26, 1993)
Orders during the second quarter of 1994 totaled $46.8 million compared to
$41.1 million for the second quarter of 1993. Roch and its affiliate company,
which was acquired on March 24, 1994, represented $2.5 million in orders during
the second quarter of 1994. The machine tool spare parts and rebuild
operations, sold near the end of the first quarter of 1993, represented $.2
million in orders during the second quarter of 1993, and foreign currency
fluctuations caused a $.4 million increase in second quarter 1994 orders
compared to second quarter 1993. Excluding the effect of these items, orders
increased 7.3% to $43.9 million in the second quarter of 1994 from $40.9 million
in the second quarter of 1993. Sales efforts in 1994 have resulted in an
increasing number of large value orders for machines in the canning industry
from the Custom Metrology Division ("CM"). The Precision Measuring Instruments
Division ("PMI") had increasing orders, primarily from its European
distributors. Backlog at July 2, 1994 increased to $31.6 million compared to
$27.5 million at the end of the first quarter of 1994, $26.1 million at year-end
1993, and $25.9 million at the end of the first half-year of 1993.
Net Sales. Net sales in the second quarter of 1994 were $43.2 million,
compared to $40.0 million in the second quarter of 1993. Roch and its affiliate
represented $2.3 million of sales during the second quarter of 1994.
Approximately $.2 million of second quarter 1993 net sales were attributable to
machine tool spare parts and rebuild operations which businesses were sold
during the first half of 1993. Foreign currency exchange rate fluctuations
caused an increase in net sales in the second quarter of 1994 of $.4 million as
compared to the second quarter of 1993. Excluding the effect of these items,
second quarter 1994 net sales increased approximately $.7 million from second
quarter 1993 sales. A decline in net sales occurred in the Measuring Systems
Division ("MS"). MS net sales in the second quarter were 3.1% below the second
quarter of 1993. Increasing orders in the U.S. have been for larger value,
larger size machines which are not generally included in sales until subsequent
quarters due to required lead times. Net sales of PMI and CM products increased
from the prior year primarily due to the resolution of the financial
difficulties of a German distributor, which had depressed net sales during their
reorganization in the prior period.
<PAGE>
Gross Profit. Gross profit margin decreased to 31.9% in the second quarter
of 1994 from 33.7% in the second quarter of 1993. The comparative decline
resulted principally from effect of a LIFO inventory liquidation benefit of $.5
million recorded in the second quarter of 1993.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense in the second quarter of 1994, at $13.6 million,
or 31.6% of net sales, increased from the $12.2 million, or 30.4% of net sales,
incurred in the comparable period in 1993. The increase was primarily due to
the addition of Roch selling, general and administration costs since acquisition
in late March 1994 of about $.6 million and due to the Company's recording of a
provision increasing the allowance for uncollectible accounts receivable by
approximately $.6 million for collection uncertainties arising from one prior
sale to a single customer.
Operating Profit (Loss). Brown & Sharpe generated an operating profit of
$.1 million in the second quarter of 1994. This compared to an operating profit
of $1.3 million in the second quarter of 1993. In the United States, operating
profit for the second quarter of 1994 totaled $1.4 million as compared to an
operating profit of $2.0 million in the second quarter of 1993. Foreign
operations generated an operating loss of $1.3 million in the second quarter of
1994 as compared to an operating loss of $.7 million in the second quarter of
1993. The lower operating profit in the United States in the 1994 period as
compared to the 1993 period was substantially due to the LIFO inventory
liquidation benefit in the 1993 period. The greater operating loss in foreign
operations reflected the worsening performance at Brown & Sharpe's German CMM
operations and the $.6 million reserve for an account receivable, which was
partially offset by improvement at Brown & Sharpe PMI, headquartered in
Switzerland.
Interest Expense. Interest expense totaled $1.4 million in the second
quarter of 1994 compared to $1.3 million in the second quarter of 1993. This
increase reflects a $6.9 million increase in the average balance of borrowings,
primarily in the United States, which was partially offset by lower interest
rates.
Other Income, Net. Other income, net was $130,000 in the second quarter of
1994 compared to $241,000 in the second quarter of 1993.
Income Tax Provision. The provision for income taxes was $.2 million in
the second quarter of 1994 compared to none provided in the second quarter of
1993. This primarily results from tax provisions in countries with profits in
1994 without similar profits in 1993.
Net Income (Loss). As a result of the foregoing, Brown & Sharpe had a net
loss of $1.4 million ($.26 net loss per share) in the second quarter of 1994,
compared to net income of $.2 million ($.04 net income per share) in the second
quarter of 1993. Brown & Sharpe expects to report a net loss for the third
quarter of 1994 primarily resulting from the effect of normally low sales volume
due to vacations, shutdowns, etc. in the third quarter.
<PAGE>
RESULTS OF OPERATIONS
(Half-Year Ended July 2, 1994 compared to Half-Year Ended June 26, 1993)
Orders during the first half-year of 1994 totaled $84.7 million compared to
$78.1 million for the first half-year of 1993. Roch and its affiliate company
which was acquired on March 24, 1994, represented $2.5 million in orders during
the first half of 1994. The machine tool spare parts and rebuild operations,
sold near the end of the first quarter of 1993, represented $1.9 million in
orders during the first half of 1993, and foreign currency fluctuations had very
little impact on the comparable 1994 and 1993 periods. Excluding the effect of
these items, orders increased 7.9% to $82.2 million in the first half-year of
1994 from $76.2 million in the first half-year of 1993. Sales efforts have
resulted in an increasing number of larger value orders in the U.S. Orders for
machines increased in 1994 from the canning industry for CM equipment and PMI
had increasing orders, primarily from its European distributors. MS orders were
slightly higher in the first half of 1994 than they were in the first half of
1993. Backlog at July 2, 1994 increased to $31.6 million compared to $26.1
million at year-end 1993 and $25.9 million at the end of the first half-year of
1993.
Net Sales. Net sales in the first half of both 1994 and 1993 were $79.8
million. Roch and its affiliate represented $2.3 million in sales during the
first half of 1994. Approximately $1.9 million of first half 1993 net sales
were attributable to machine tool spare parts and rebuild operations which
businesses were sold during the first half of 1993. Foreign currency exchange
rate fluctuations caused an increase in net sales in the first half of 1994 of
$.3 million as compared to the first half of 1993. Excluding the effect of
these items, first half 1994 net sales declined approximately $.7 million from
first half 1993 sales. A decline in net sales occurred in MS. MS net sales in
the half-year were 8.6% below the first half of 1993, largely as a result of
entering 1993 with a larger backlog than at the beginning of 1994. In 1994,
increasing U.S. orders have been received for larger value, larger size machines
which are not generally included in sales until subsequent quarters due to
required lead times. Net sales of PMI and CM products increased from the prior
year primarily due to the resolution of the financial difficulties of a German
distributor, which had depressed net sales in the prior period.
Gross Profit. Gross profit margin decreased to 30.7% in the first half of
1994 from 31.0% in the first half of 1993. The decline resulted in part from a
LIFO inventory liquidation benefit of $.5 million recorded in the first half of
1993, which was partially offset by reduced design engineering costs in 1994 in
PMI of about $.2 million.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense in the first half of 1994, at $25.9 million or
32.5% of net sales, increased from the $22.9 million, or 28.7% of net sales,
incurred in the comparable period in 1993. Nearly all of the increase was due to
special items including an extra week of expenses of about $1 million in the
first half of 1994 as compared to the first half of 1993, the receipt of
litigation settlement proceeds in the first half of 1993 of about $.5 million,
the addition of Roch selling, general and administrative costs since acquisition
in late March 1994 of about $.6 million, and the recording in the second quarter
of 1994 of a provision increasing the allowance for uncollectible accounts
receivable by approximately $.6 million for collection uncertainties arising
from one prior sale to a single customer.
Operating Profit (Loss). Brown & Sharpe generated an operating loss of
$1.4 million in the first half of 1994. This compared to an operating profit of
$1.9 million in the first half of 1993. In the United States, operating profit
for the first half of 1994 totaled $1.2 million as compared to an operating
profit of $2.8 million in the first half of 1993. Foreign operations generated
an operating loss of $2.6 million in the first half of 1994 as compared to an
operating loss of $.9 million in the first half of 1993. The lower operating
profit in the United States in the 1994 period as compared to the 1993 period
was substantially due to the receipt of litigation settlement proceeds and the
LIFO inventory liquidation benefit in the 1993 period, as well as an extra week
of selling, general and administrative expense in the 1994 period. Brown &
Sharpe believes that its normal sales pattern would not generally result in
proportionate increases in net sales in a twenty-seven week half year as
compared to a twenty-six week half year. The greater
<PAGE>
operating loss in foreign operations reflected the worsening performance at
Brown & Sharpe's German CMM operations and the $.6 million reserve for an
account receivable, which was partially offset by improvement at Brown & Sharpe
PMI, headquartered in Switzerland.
Interest Expense. Interest expense totaled $2.7 million in the first half
of 1994 compared to $2.5 million in the first half of 1993. This increase
reflects a $9.7 million increase in the average balance of borrowings, primarily
in the United States, which was partially offset by lower interest rates
averaging 4.0% in the first half of 1994 as compared to 4.2% in the first half
of 1993.
Other Income, Net. Other income, net was $178,000 in the first half of
1994 and $2.8 million in the first half of 1993. The 1993 first half included a
gain of approximately $2.0 million on the sale of certain small business
operations near the end of the first quarter, partially offset by foreign
exchange losses.
Income Tax Provision. The provision for income taxes was $.3 million in
the first half of 1994 compared to $.5 million in the first half of 1993. The
1993 provision was offset by deferred tax benefits of $.5 million due to
reductions in deferred tax liabilities as a result of losses in certain of Brown
& Sharpe's European subsidiaries.
Net Income (Loss). As a result of the foregoing, Brown & Sharpe had a net
loss of $4.2 million ($.83 net loss per share) in the first half of 1994,
compared to net income of $1.4 million ($.29 net income per share) in the first
half of 1993. Brown & Sharpe expects to report a net loss for the third quarter
of 1994 primarily resulting from the effect of normally low sales volume due to
vacations, shutdowns, etc. in the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, Brown & Sharpe has met its liquidity needs, including
capital expenditures, working capital needs and the funding of operating losses,
through cash generated from operations, sale proceeds of discontinued
businesses, borrowings under secured and unsecured lines of credit and the
Foothill Facility, a renewable secured $15 million two-year revolving credit
facility entered into in June 1993. Amounts outstanding under the lines of
credit are payable on demand, and certain of the lines extended to Brown &
Sharpe's foreign subsidiaries are secured by restricted cash balances and other
assets. The Foothill Facility provides for borrowings based on a percentage of
eligible domestic accounts receivable and finished inventory, is secured by
substantially all domestic assets (including the stock of domestic subsidiaries
and 65% of the stock of certain foreign subsidiaries), and requires maintenance
of a minimum current ratio, a maximum ratio of debt to adjusted net worth,
minimum adjusted net worth and minimum working capital. At July 2, 1994, Brown
& Sharpe had borrowings of $22.9 million under the lines of credit and $11.4
million borrowed under the Foothill Facility, compared to total availability at
that date of $29.2 million under the lines of credit and $15.0 million under the
Foothill Facility. At July 2, 1994, Brown & Sharpe was required to maintain an
aggregate of $6.1 million in restricted cash balances to support certain of the
foreign lines of credit.
To provide additional liquidity, Brown & Sharpe recently entered into a
commitment letter for an $8.5 million, five-year mortgage financing (the "North
Kingstown Mortgage") secured by the Company's North Kingstown, Rhode Island
facility. The North Kingstown Mortgage bears interest at 8.75% with annual
amortization based on a ten-year schedule and the remaining balance is due at
maturity. Closing on this financing, expected near the end of August, is
subject to completion of a property survey, an environmental survey that already
has been completed and accepted, and appropriate loan documentation.
In conjunction with the planned acquisition of DEA, the Company had filed
an S-1 registration statement for a public offering of $75.0 million senior
notes (the "Senior Notes"). However, the Company
<PAGE>
has decided to shift to the New Financing described below, which is expected to
have lower aggregate interest changes and other fees than would result with the
Senior Notes financing program.
As part of the New Financing program, the Company has received written
commitments from two banks to provide 3 year term loan facilities for a total of
$25.0 million. The banks' commitments for the term loans are contingent upon
receipt of a full guarantee from Finmeccanica and completion of the DEA
transaction. Brown & Sharpe has received a written commitment from Finmeccanica
to provide the necessary guarantees to the banks coincident with the completion
of the DEA Acquisition. The interest rate is expected to be floating at about 75
basis points over LIBOR or the banks' cost of funds. The Company has also
received written assurances from four Italian banks for the continuation of
their existing demand lines of credit to DEA totaling $7.5 million. Brown &
Sharpe is also negotiating with a number of other foreign banks to provide
additional working capital lines of credit for DEA.
Also, to provide for working capital needs expected after the DEA
Acquisition, Brown & Sharpe is negotiating with several financial institutions
to enter into a secured revolving credit facility which will provide for
borrowings by Brown & Sharpe of up to $25.0 million subject to borrowing base
limitations. The Company has received a written commitment from one of the
financial institutions. Availability under this revolving credit commitment is
subject only to completion of both the DEA Acquisition and appropriate loan
documentation. Brown & Sharpe expects that if obtained, such revolving credit
facility will be secured by a first priority lien, subject to certain permitted
encumbrances, on domestic accounts receivable and inventory, a second position
on the North Kingstown facility and certain equipment utilized there, and a
portion of the shares of certain of Brown & Sharpe's subsidiaries, will have a
term of three years and will bear interest at a floating rate.
It is anticipated that with the New Financing program, all existing Brown &
Sharpe long-term debt totaling $33.8 million and $6.5 million of Italian
government subsidized long-term debt acquired in the DEA Acquisition will be
retained. The combined Company's long-term debt would be augmented by new long-
term debt including $25.0 million from the guaranteed three year term loans and
$8.5 million from the North Kingstown Mortgage. The $33.5 million proceeds from
these new financings would be utilized to repay certain existing Brown & Sharpe
short-term debt and, the U.S. short-term debt acquired in the DEA Acquisition.
Following the expected completion of the DEA Acquisition and the New
Financing arrangements, management believes that the availability of borrowings,
together with cash flow from current levels of operations and anticipated cost
savings from the integration of DEA, Roch and Mauser, will be sufficient to meet
operational cash requirements (including one-time costs in integrating Roch,
Mauser and DEA), working capital requirements and planned capital expenditures
well into 1997. However, failure to achieve anticipated cost savings from the
integration of DEA, Roch and Mauser, or unexpected delays in or costs related to
the integration, could have a material adverse affect on Brown & Sharpe's
liquidity.
Cash Flow. In the first half of 1994, operations used cash of $.7 million;
the net loss of $4.2 million was offset by accounts receivable collections from
typically higher sales near the end of the preceding fourth quarter.
In the first half of 1994, investment transactions used cash of $1.6
million, of which capital expenditures were $1.4 million, whereas, investment
transactions provided cash of $3.8 million in the first half of 1993 with
proceeds from the sale of the spares and rebuild operations of $8.7 million
being partially offset by capital expenditures of $2.0 million amongst other
transactions.
Cash provided from financing transactions was $3.0 million in the first
half of 1994 compared to cash used of $1.5 million in the first half of 1993.
Working Capital. Working capital was $43.3 million at the end of the first
half of 1994 compared to $46.0 million at the end of 1993. This change resulted
largely from the timing of sales during the
<PAGE>
respective periods with higher sales in December of 1993 resulting in higher
accounts receivable. Inventories increased to $59.8 million at July 2, 1994, an
increase of $5.8 million from the end of 1993 which did not require a
substantial use of cash because it primarily resulted from Brown & Sharpe's
purchase of Roch and Mauser in the first quarter of 1994 using Brown & Sharpe
Shares of Class A Common Stock. Also, debt increased at July 2, 1994 as compared
to December 25, 1993 due to debt of Roch existing at its acquisition date,
increased borrowing and foreign currency exchange rate changes.
Capital Expenditures. Brown & Sharpe's capital expenditures were
approximately $1.4 million in the first half of 1994 compared to $1.8 million in
the first half of 1993. In addition, capital spending to construct a new
building at its German facility, substantially completed in 1992, amounted to
approximately $.2 million in the first half of 1993.
After the expected completion of the DEA Acquisition, total capital
expenditures for the combined Company are expected to increase. DEA capital
expenditures totaled $.6 million in the first half of 1994 compared to $1.2
million in the first half of 1993. Management estimates that annual capital
expenditures of approximately $6.0 to $8.0 million are required to tool new
products, improve product and service quality, expand the distribution network,
and support the operations of the combined Company. Planned capital expenditures
in 1994 and 1995 will include an aggregate of approximately $2.1 million for the
construction of a new facility in Telford, England to replace an existing
facility for which the lease expires and is non-renewable.
Acquisitions and Divestitures. There were no divestitures in 1994, and
Roch and its affiliate, Mauser, were acquired in late March 1994. Proceeds from
the sale of the machine tool parts and rebuild operations during the first half
of 1993 provided $8.7 million of cash.
As announced in June, 1994, Brown & Sharpe has entered into an Acquisition
Agreement (the "Acquisition Agreement") with Finmeccanica S.p.A. dated as of
June 10, 1994 for the purchase by Brown & Sharpe of Finmeccanica's DEA Group of
metrology companies and business units. DEA headquartered in Turin, Italy,
manufactures and markets worldwide a variety of types of coordinate measuring
machines and systems with 1993 worldwide sales of about $110 million. The
Acquisition Agreement provides that Brown & Sharpe would issue 3,450,000 shares
of Brown & Sharpe Class A Common Stock to Finmeccanica and that DEA would have
an estimated $13.8 million debt at the Closing. The purchase price is subject to
a post-closing adjustment under certain circumstances as provided in the
Acquisition Agreement. In connection with the Closing of the DEA Acquisition,
Brown & Sharpe and Finmeccanica will enter into a Shareholders Agreement
providing among other things for a limitation on Finmeccanica's percentage
ownership of Brown & Sharpe common stock, a Finmeccanica preemptive right to
elect to acquire a portion of future issuances of stock by Brown & Sharpe in
order to maintain its percentage ownership of Brown & Sharpe on a fully diluted
basis (as defined) until December 31, 1998 (or earlier upon the happening of
certain specified events), and a requirement that Finmeccanica not transfer the
acquired Brown & Sharpe shares to any person other than Brown & Sharpe for a
specified period and affording Brown & Sharpe certain rights of refusal with
respect thereto for a further specified period. The Acquisition Agreement also
provides that Brown & Sharpe's Board of Directors will be increased from seven
to ten and that Finmeccanica would have three representatives on the Brown &
Sharpe Board.
The obligations of Brown & Sharpe and Finmeccanica to effect the DEA
Acquisition transaction are subject to various closing conditions specified in
the Acquisition Agreement, including approval by Brown & Sharpe's shareholders,
completion by Brown & Sharpe of arrangements to raise necessary funding on terms
deemed appropriate by Brown & Sharpe, and the approval of all governmental
authorities that are necessary. The waiting period with respect to the DEA
Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act expired in
early August, 1994, after refilings by the parties in July 1994. It is expected
that Brown & Sharpe will shortly call a Special Meeting of Shareholders to be
held in September, 1994 to take action on the DEA Acquisition. In the meantime,
arrangements to provide for the New Financing program described above are under
way. However, there can be no assurance that the financing condition or other
closing conditions under the Acquisition Agreement will be satisfied.
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's 1994 Annual Meeting of Stockholders was held on Friday, April
29, 1994. The stockholders voted to (1) fix the number of directors at seven
and to elect two members of the Board of Directors to serve for the ensuing
year; and (2) ratify the appointment of Coopers & Lybrand as the Company's
independent accountants for the year 1994.
The tabulation of votes for the nominees for directors were as follows:
For Withheld
--- --------
Fred M. Stuber (Class A only) 3,527,675 27,857
Paul R. Tregurtha (Class A and B) 6,747,864 131,666
The vote on the appointment of the Company's independent accountants was
6,809,803 for; 26,785 against; with 42,940 abstaining.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. See Exhibit Index annexed.
B. Reports on Form 8-K were filed during the quarter ended July 2, 1994.
On May 13, 1994, Brown & Sharpe filed a Current Report on Form 8-K under
Item 2 reporting the Acquisition of Ets. Pierre Roch S.A. (Roch) and its
affiliate, Mauser Prazisions - Messmittel GmbH (Mauser).
On June 9, 1994, Brown & Sharpe filed a Form 8-K/A Amendment to Current
Report on the May 13, 1994 Form 8-K updating Item 2 and including Item 7,
financial statements of Roch and Mauser for 1991 through 1994.
Brown & Sharpe filed a Current Report on Form 8-K under Item 5 dated June
24, 1994 reporting: the signing of an Acquisition Agreement between the
Company and Finmeccanica; the form of a Shareholders' Agreement to be
entered into in conjunction with this Acquisition Agreement; an Amendment
to the Company's Rights Agreement; and non-financial portions of the
Company's Registration Statement on Form S-1 filed on June 27, 1994.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN & SHARPE MANUFACTURING COMPANY
By: /s/ Charles A. Junkunc
------------------------------------------
Charles A. Junkunc
Vice President and Chief Financial Officer
(Principal Financial Officer)
August 16, 1994
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
4. Indenture dated as of October 1, 1980 (including form of debenture)
between the Company and Morgan Guaranty Trust Company of New York as
trustee relating to 9-1/4% convertible subordinated debentures due
December 15, 2005, originally filed as Exhibit (b) (1) to Form S-16
Registration Statement No. 2-69203 dated October 1, 1980 and incorporated
herein by reference.
The Registrant hereby agrees to furnish a copy to the Commission of other
instruments defining the rights of holders of long-term debt, as to which
the securities thereunder do not exceed ten percent of total assets on a
consolidated basis.
10.1 Definitive Acquisition Agreement providing for the combination of the DEA
metrology business of Finmeccanica (the "DEA Group") with the Brown &
Sharpe Measuring Systems Division dated as of June 10, 1994 between Brown
& Sharpe Manufacturing Company and Finmeccanica S.p.A, was filed as
Exhibit 1 to Form 8-K dated June 24, 1994, and is incorporated herein by
reference.
10.2 Amendment No. 3 dated June 16, 1994 to Rights Agreement, dated March 9,
1988 between the Company and the First National Bank of Boston, as Rights
Agent, was filed as Exhibit 3 to Form 8-K dated June 24, 1994, and is
incorporated herein by reference.
11. Computation of Per Share Data for the twenty-seven week period ended July
2, 1994 and the twenty-six week period ended June 26, 1993.
<PAGE>
EXHIBIT 11
----------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
COMPUTATION OF PER SHARE DATA
-----------------------------
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
For the Half Year Ended
----------------------------
July 2, 1994 June 26, 1993
------------ -------------
<S> <C> <C>
Computation of income (loss):
Net income (loss) used for computation
of primary earnings per share $ (4,242) $ 1,443
Add interest expense, net of taxes,
assuming conversion of debentures 518 786
---------- ----------
Net income (loss) used for computation
of fully diluted earnings per share $ (3,724) $ 2,229
========== ==========
Computation of shares:
Weighted average number of common shares
outstanding during the period 5,114,403 4,967,758
Dilutive stock options -- --
---------- ----------
Weighted average number of common shares
used for computation of
primary earnings per share 5,114,403 4,967,758
Additional dilutive stock options -- --
Assumed conversion of convertible
debentures 609,523 647,619
---------- ----------
Weighted average number of common
shares used for computation of
fully diluted earnings per share 5,723,926 5,615,377
========== ==========
Per common share:
Primary and fully diluted net income
(loss) per share $(.83) $.29
===== ====
</TABLE>
