<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 October 1, 1994
---------------
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
-------------------------------------------------------------------------
(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; 8,109,690 Class A common
shares, 539,725 Class B common shares, par value $1, outstanding as of October
1, 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 Nine Months Ended
--------------------- -------------------------
Oct. 1, 1994 Sept. 25, 1993 Oct. 1, 1994 Sept. 25, 1993
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $39,641 $32,935 $119,452 $112,696
Cost of goods sold 28,610 24,531 83,947 79,500
Selling, general and
administrative expense 12,978 11,629 38,849 34,552
Restructuring charges 1,000 -- 1,000 --
------- ------- -------- --------
Operating (loss) (2,947) (3,225) (4,344) (1,356)
Interest expense (1,736) (1,322) (4,459) (3,783)
Other income, net 268 277 446 2,312
------- ------- -------- --------
(Loss) before
income taxes (4,415) (4,270) (8,357) (2,827)
Income tax provision 200 -- 500 --
------- ------- -------- --------
Net (loss) $(4,615) $(4,270) $ (8,857) $ (2,827)
======= ======= ======== ========
Primary and fully diluted
(loss) per common share $(.86) $(.86) $(1.71) $(.57)
======= ======= ======== ========
Weighted average shares
outstanding during
the period 5,350,140 4,971,148 5,192,982 4,968,978
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Oct. 1, 1994 December 25,1993
------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,866 $ 2,094
Restricted cash 6,191 6,078
Accounts receivable, net of allowances for
doubtful accounts of $4,075 and $1,320 83,770 44,525
Inventories 95,243 53,963
Prepaid expenses and other current assets 10,338 3,031
-------- --------
Total current assets 217,408 109,691
Property, plant and equipment:
Land 6,868 6,398
Buildings and improvements 34,770 32,315
Machinery and equipment 88,533 77,053
-------- --------
130,171 115,766
Less-accumulated depreciation 84,290 72,212
-------- --------
45,881 43,554
Other assets 13,589 12,626
-------- --------
$276,878 $165,871
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable and current installments of
long-term debt $ 28,918 $ 31,804
Accounts payable 27,593 12,716
Accrued expenses and income taxes 49,375 19,146
-------- --------
Total current liabilities 105,886 63,666
Long-term debt 73,878 32,696
Deferred income taxes 1,962 1,763
Unfunded accrued pension cost 4,972 4,226
Termination indemnities 7,960 --
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 8,117,182 shares
in 1994 and 4,431,890 shares in 1993 8,117 4,432
Class B, par value $1; authorized
2,000,000 shares; issued and outstanding
539,725 shares in 1994 and 547,604 shares
in 1993 540 548
Additional paid in capital 66,851 45,710
Retained earnings (accumulated deficit) (4,480) 4,377
Cumulative foreign currency translation
adjustment 11,970 9,394
Treasury stock: 7,492 shares in 1994 and
8,076 in 1993 at cost (163) (163)
Unearned compensation (615) (778)
-------- --------
Total shareowners' equity 82,220 63,520
-------- --------
$276,878 $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 Nine Months Ended
-------------------------
Oct. 1, 1994 Sept. 25, 1993
------------- ---------------
<S> <C> <C>
Cash Provided by (Used in) Operations:
Net income (loss) $ (8,857) $(2,827)
Adjustment for Noncash Items:
Depreciation and amortization 4,223 4,673
Pension credits and charges 336 225
Deferred income taxes 100 (500)
Gain on sale of operations -- (2,182)
Changes in Working Capital:
Accounts receivable 8,410 (3,470)
Inventories 1,176 (903)
Prepaid expenses and other current assets (751) (1,013)
Accounts payable and accrued expenses (2,658) 3,409
-------- -------
Cash Provided by (Used in) Operations 1,979 (2,588)
-------- -------
Investment Transactions:
Capital expenditures (2,031) (2,796)
Proceeds from sale of operations -- 8,700
Cash equivalent pledged 113 (6,000)
Other investing activities (1,326) (768)
-------- -------
Cash Provided by (Used in) Investment
Transactions (3,244) (864)
-------- -------
Financing Transactions:
Increase in long-term and short-term debt 37,301 1,506
Payment of long-term and short-term debt (17,457) (1,020)
Other financing activities 2,444 --
-------- -------
Cash Provided by (Used in) Financing
Transactions 22,288 486
-------- -------
Effect of Exchange Rate Changes on Cash (1,251) (170)
-------- -------
Cash and Cash Equivalents:
Increase (decrease) during the period 19,772 (3,136)
Beginning balance 2,094 4,640
-------- -------
Ending balance $ 21,866 $ 1,504
======== =======
Supplementary Cash Flow Information:
Interest paid $ 3,347 $ 2,819
======== =======
Taxes paid $ 889 $ 1,027
======== =======
</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 nine months of 1994 include 14 weeks and 40 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
nine months ended September 25, 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 third quarter of 1994 was increased by $154 ($.03 per
share) and for the first nine months of 1994 was reduced by $255 ($.05 per
share), respectively, and net income in the third quarter and first nine
months of 1993 was decreased by $328 ($.07 per share) and reduced by $484
($.10 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 nine months of 1994
is $500. The tax provision for the first nine months of 1993 was $0
reflecting a $500 benefit derived from reductions in deferred tax
liabilities.
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. Brown & Sharpe Manufacturing Company, together with its subsidiary Brown &
Sharpe International Capital Corporation, acquired on September 28, 1994,
the stock of DEA S.p.A., an Italian corporation and its related metrology
business, from Finmeccanica S.p.A., an Italian corporation. The business
of DEA S.p.A. and its subsidiaries ("DEA") is headquartered in Turin,
Italy. The acquisition has been accounted for as a purchase. Accordingly,
the Company's consolidated balance sheet at October 1, 1994 includes the
assets and liabilities of DEA S.p.A. and its subsidiaries. The Company's
consolidated statement of net income (loss) and cash flow will include the
results of operation of DEA S.p.A. and its subsidiaries commencing October
2, 1994.
The purchase price paid by Brown & Sharpe was the delivery to Finmeccanica
S.p.A. at the Closing of 3,450,000 shares of Class A Common Stock of Brown
& Sharpe. In addition, the DEA Acquisition Agreement provides for a post-
closing purchase price adjustment pursuant to which additional shares of
Class A Common Stock of Brown & Sharpe may, under the specified
circumstances, be required to be delivered to Finmeccanica S.p.A. The
purchase price was
<PAGE>
determined through negotiation by the parties. The terms of the post-
closing purchase price adjustment provisions are based on a comparison of
adjusted net asset value (as defined in the DEA Acquisition Agreement) of
DEA as of June 30, 1993 and adjusted net asset value of DEA as of the
Pricing Date (as defined and calculated in accordance with a formula in the
DEA Acquisition Agreement) and after taking into account the reduction of
net assets as of the Pricing Date by virtue of the non-recourse factoring
of a mutually agreed amount of receivables of DEA prior to the Pricing Date
(and after reflecting an additional adjustment relating to any difference
between the estimated Pricing Date amount of indebtedness of DEA to be
discharged by Finmeccanica and the actual amount, as finally determined, of
such indebtedness as of the Pricing Date). If the post-closing adjustment
indicates an increase or a decrease in the purchase price, then either the
Company will issue to Finmeccanica an additional number of shares of Class
A Common Stock with a value equal to such positive difference or
Finmeccanica will make a cash payment to the Company, equal to such
negative difference. However, if such positive or negative difference is
less than $500,000, no adjustment will be made. The amount of any purchase
price adjustment will be conclusively determined, subsequent to the closing
date of the DEA Acquisition, based upon the specified calculations and the
audited combined balance sheet as of the Pricing Date of DEA and its
subsidiaries as determined under the procedures set forth in the DEA
Acquisition Agreement. The DEA Acquisition Agreement also provided that
prior to the closing Finmeccanica was required to assume or discharge all
indebtedness for borrowed money of DEA other than an amount of indebtedness
net of cash in excess of L0.8 billion, to remain outstanding on the
closing, which amount is determined as of July 31, 1994 (the "Pricing
Date") pursuant to a formula in the DEA Acquisition Agreement.
Approximately $13.9 million aggregate principal amount of DEA indebtedness
remained outstanding at the closing. Subsequently, $7.7 million
representing the short-term portion of the borrowing was repaid.
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 $28,500
($344 after purchase price accounting adjustments). The estimated fair
values of assets and liabilities after allocation are summarized as
follows:
<TABLE>
<S> <C>
Cash $ 3,040
Accounts receivable 43,710
Inventory 33,964
Other current 5,830
Accounts payable and accruals 41,828
Short-term debt 7,710
Long-term debt 6,190
Other non-current 7,960
-------
$22,856
=======
</TABLE>
The Company's unaudited combined results of operations for the nine months
ended October 1, 1994 and the year ended December 25, 1993 on a pro forma
basis assuming the acquisition of DEA and Roch (which was acquired in late
March 1994) occurred at the beginning of 1994 and 1993, respectively are as
follows:
<TABLE>
<CAPTION>
First
Nine Months Year
1994 1993
---- ----
<S> <C> <C>
Net sales $187,299 $279,742
Net income (loss) $ (5,963) $ 8,924
Primary and fully diluted income (loss) per common share $ (1.14) $ 1.08
</TABLE>
<PAGE>
7. In conjunction with the DEA acquisition, Brown & Sharpe completed new long-
term and short-term financing arrangements including: closing on a $8.5
million, 5 year term - 10 year amortization, mortgage secured by Brown &
Sharpe's facility in North Kingstown, Rhode Island; obtaining $25 million
of three-year term loans with $6.7 million borrowed from San Paolo Bank and
$18.3 million borrowed from Banca Commerciale Italiana, both loans having
interest as periodically selected by Brown & Sharpe at the rate of libor
plus 0.6% or prime for each of the banks, and both of which loans are
guaranteed by Finmeccanica S.p.A.; and restructured the Foothill Capital
Corporation $15 million secured revolving credit facility, increasing it to
$25 million with a termination date of September 30, 1997 and providing for
the pledge of additional collateral, namely 65% of the shares of stock of
DEA and also the accounts receivables, inventories and certain other assets
of the United States subsidiary of DEA S.p.A.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Brown & Sharpe Manufacturing Company acquired the Roch and DEA metrology
businesses on March 24, 1994 and September 28, 1994, respectively. These
acquisitions have been accounted for using the purchase method of accounting.
Accordingly, the consolidated statements of income (loss) and cash flow include
the results of their operations subsequent to April 2, 1994 and October 1, 1994,
respectively, and the ending consolidated balance sheet includes their assets
and liabilities.
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
nine months ended October 1, 1994 and September 25, 1993:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
Oct. 1 Sept. 25 Oct. 1 Sept. 25
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 72.2 74.5 70.3 70.5
Selling, general and
administrative expense 32.7 35.3 32.5 30.7
Restructuring charges 2.5 -- .8 --
----- ----- ----- ----
Operating (loss) (7.4) (9.8) (3.6) (1.2)
Interest expense 4.4 4.0 3.8 3.4
Other income, net .7 .8 .4 2.1
----- ----- ----- ----
Income (loss) before
income taxes (11.1) (13.0) (7.0) (2.5)
Income tax provision .5 -- .4 --
----- ----- ----- ----
Net income (loss) (11.6) (13.0) (7.4) (2.5)
===== ===== ===== ====
</TABLE>
RESULTS OF OPERATIONS
(Quarter Ended October 1, 1994 compared to Quarter Ended September 25, 1993)
Orders and Backlog. Orders during the third quarter of 1994 totaled $44.2
million compared to $33.5 million for the third quarter of 1993. Roch and its
affiliate company, which was acquired on March 24, 1994, represented $4.3
million in orders during the third quarter of 1994, and foreign currency
fluctuations caused a $2.5 million increase in third quarter 1994 orders
compared to third quarter 1993. Excluding the effect of these items, orders
increased 11.6% to $37.4 million in the third quarter of 1994 from $33.5 million
in the third quarter of 1993. The third quarter includes increasing orders in
the U.S. for larger value, larger size CMMs in the Measuring Systems Division
("MS"), particularly from the automotive industry which are not generally
included in sales until subsequent quarters due to required lead times. Sales
efforts in 1994 have also 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 October 1, 1994 increased
to $73.7 million (including $37.8 million from the purchase of DEA on September
28, 1994 and $1.6 million from the purchase of the Roch business during the
first quarter of 1994), compared to $31.6 million at the end of the second
quarter of 1994 (which included Roch), $26.1 million at year-end 1993, and $27.1
million at the end of the third quarter of 1993.
Net Sales. Net sales in the third quarter of 1994 were $39.6 million,
compared to $32.9 million in the third quarter of 1993. Roch and its affiliate
represented $3.9 million of sales during the third quarter
<PAGE>
of 1994. Foreign currency exchange rate fluctuations caused an increase in net
sales in the third quarter of 1994 of $2.4 million as compared to the third
quarter of 1993. Excluding the effect of these items, third quarter 1994 net
sales increased approximately $.4 million from third quarter 1993 sales.
Gross Profit. Gross profit margin increased to 27.8% in the third quarter
of 1994 from 25.5% in the third quarter of 1993. This, however, represents a
comparative decline from 31.9% gross profit margin in the second quarter of 1994
and 29.2% in the first quarter of 1994. This relative decline resulted largely
from higher purchase cost of European manufactured products which were sold in
the U.S. and was caused by the increasing value of European currencies relative
to the U.S. dollar. The effect was to increase costs in the third quarter of
1994 by about $.6 million. Product sales mix also resulted in lower gross
profit margin in this quarter.
Selling, General and Administrative Expense. Selling, general and
administrative expense in the third quarter of 1994 was $13.0 million or 32.7%
of net sales, representing an increase from $11.6 million or 35.3% of net sales
in the comparable period in 1993. The increase was primarily due to the
addition of Roch selling, general and administration expense of $.8 million in
the third quarter of 1994. Roch was acquired by Brown & Sharpe in late March
1994. The increasing foreign currency exchange rates in the third quarter of
1994 resulted in increasing translated U.S. dollar costs.
Restructuring Charges. Restructuring charges of $1.0 million, principally
Brown & Sharpe employee severance and Brown & Sharpe sales offices closing
costs, associated with integrating Brown & Sharpe's existing operations with
those of DEA, acquired on September 28, 1994, were provided for in the third
quarter of 1994, in addition to certain other expenses already recorded,
resulting from actions taken in anticipation of the completion of the purchase
of DEA. Additional Brown & Sharpe Restructuring Charges, anticipated to be in
the range of about $1.5 million to $2.0 million, will be recognized in future
periods as appropriate actions are taken in support of integration of the DEA
and Roch acquisitions.
Operating (Loss). Brown & Sharpe incurred an operating loss of $1.9
million in the third quarter of 1994. This compared to an operating loss of
$3.2 million in the third quarter of 1993. In the United States, operating loss
for the third quarter of 1994 totaled $.8 million as compared to an operating
profit of $.6 million in the third quarter of 1993. Foreign operations incurred
an operating loss of $1.1 million in the third quarter of 1994 as compared to an
operating loss of $3.8 million in the third quarter of 1993. The lower operating
results in the United States in the 1994 period as compared to the 1993 period
was substantially due to the higher costs discussed in the "Gross Profit"
section above. The loss in operations when comparing 1994 to 1993 reflects cost
containment measures including previous personnel reductions and restricted
spending.
Interest Expense. Interest expense totaled $1.7 million in the third
quarter of 1994 compared to $1.3 million in the third quarter of 1993. This
increase reflects $14.1 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 $268,000 in the third quarter of
1994 compared to $277,000 in the third quarter of 1993.
Income Tax Provision. The provision for income taxes was $.2 million in
the third quarter of 1994 compared to $0 in the third quarter of 1993. This
primarily results from tax provisions in countries with profits in 1994 without
similar profits in 1993.
Net (Loss). As a result of the foregoing, Brown & Sharpe had a net loss of
$4.6 million ($.86 net loss per share) in the third quarter of 1994, compared to
net loss of $4.3 million ($.86 net loss per share) in the third quarter of 1993.
<PAGE>
RESULTS OF OPERATIONS
(Nine Months Ended October 1, 1994 compared to Nine Months Ended
September 25, 1993)
Orders and Backlog. Orders during the first nine months of 1994 totaled
$128.9 million compared to $111.5 million for the first nine months of 1993.
Roch and its affiliate company which was acquired on March 24, 1994, represented
$6.8 million in orders during the first nine months 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 nine months of 1993,
and foreign currency fluctuations had an effect of increasing orders by $2.5
million as compared to 1993. Excluding the effect of these items, orders
increased 9.1% to $119.6 million in the first nine months of 1994 from $109.6
million in the first nine months of 1993. Sales efforts have continued to
result 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 nine months of 1994 than they were in the first
nine months of 1993. Backlog at October 1, 1994 increased to $73.7 million,
including $37.8 million from the purchase of DEA on September 28, 1994, compared
to $26.1 million at year-end 1993 and $27.1 million at the end of the third
quarter of 1993.
Net Sales. Net sales in the first nine months of 1994 and 1993 were $119.5
million and $112.7 million, respectively. Roch and its affiliate represented
$6.2 million in sales during the first nine months of 1994. Approximately $1.9
million of first nine month 1993 net sales were attributable to machine tool
spare parts and rebuild operations which businesses were sold during the first
nine months of 1993. Foreign currency exchange rate fluctuations caused an
increase in net sales in the first nine months of 1994 of $2.1 million as
compared to the first nine months of 1993. Excluding the effect of these items,
first nine month 1994 net sales increased approximately $.4 million from first
nine month 1993 sales. A decline in net sales occurred in MS. MS net sales in
the nine months were 4.1% below the first nine months 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 increased slightly to 29.7% in the first
nine months of 1994 from 29.5% in the first nine months of 1993. This, however,
represents a decline from 30.7% gross profit margin in the first half year which
largely resulted from increased cost of manufactured goods purchased from Europe
caused by the increasing value of European currencies relative to the U.S.
dollar. This approximated $.6 million in the third quarter of 1994.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense in the first nine months of 1994, at $38.8
million or 32.5% of net sales, increased from the $34.6 million, or 30.7% 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 nine months of 1994 as compared to the first nine months of 1993,
the receipt of litigation settlement proceeds in the first nine months of 1993
of about $.5 million, the addition of Roch selling, general and administrative
costs since acquisition in late March 1994 of about $1.4 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. A
lesser amount was also due to the weakening U.S. dollar foreign currency
exchange rate.
Restructuring Charges. Restructuring charges of $1.0 million, principally
Brown & Sharpe employee severance and Brown & Sharpe sales offices closing
costs, associated with integrating Brown & Sharpe's existing operations with
those of DEA, acquired on September 28, 1994, were provided for in the third
quarter of 1994, in addition to certain other expenses already recorded,
resulting from actions taken in anticipation of the completion of the purchase
of DEA. Additional Brown & Sharpe Restructuring Charges, anticipated to be in
the range of about $1.5 million to $2.0 million, will be recognized in future
periods as appropriate actions are taken in support of integration of the DEA
and Roch acquisitions.
<PAGE>
Operating (Loss). Brown & Sharpe generated an operating loss of $3.3
million in the first nine months of 1994. This compared to an operating profit
of $1.4 million in the first nine months of 1993. In the United States,
operating profit for the first nine months of 1994 totaled $.4 million as
compared to an operating profit of $1.8 million in the first nine months of
1993. Foreign operations generated an operating loss of $3.7 million in the
first nine months of 1994 as compared to an operating loss of $2.7 million in
the first nine months 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 a LIFO inventory liquidation
benefit in the 1993 period and increased cost of European purchased goods
resulting from unfavorable foreign currency exchange rate changes, as well as an
additional 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 forty week period
as compared to a thirty-nine week period. The loss in international operations
when comparing 1994 to 1993 reflects 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 $4.4 million in the first nine
months of 1994 compared to $3.8 million in the first nine months of 1993. This
increase reflects a $11.0 million increase in the average balance of borrowings,
primarily in the United States, which was partially offset by lower interest
rates in the first nine months of 1994 as compared to in the first nine months
of 1993.
Other Income, Net. Other income, net was $446,000 in the first nine months
of 1994 and $2.3 million in the first nine months of 1993. The 1993 first nine
months 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 $.5 million in
the first nine months of 1994 compared to $0 in the first nine months of 1993.
The 1994 income tax primarily results from tax provision in countries with
profits in 1994. In 1993, the tax provision of $0 reflects 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 (Loss). As a result of the foregoing, Brown & Sharpe had a net loss of
$8.9 million ($1.71 net loss per share) in the first nine months of 1994,
compared to net loss of $2.8 million ($.57 net loss per share) in the first nine
months of 1993.
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 under the
Foothill Facility, a renewable secured $15 million two-year revolving credit
facility entered into in June 1993.
In conjunction with the DEA acquisition which was consummated on September
28, 1994, Brown & Sharpe completed new long-term and short-term financing
arrangements including: closing on a $8.5 million, 5 year term - 10 year
amortization, mortgage secured by Brown & Sharpe's facility in North Kingstown,
Rhode Island; obtaining $25 million of three-year term loans with $6.7 million
borrowed from San Paolo Bank and $18.3 million borrowed from Banca Commerciale
Italiana, both loans having interest as periodically selected by Brown & Sharpe
at the rate of libor plus 0.6% or prime for each of the banks, and both of which
loans are guaranteed by Finmeccanica S.p.A.; and restructured the Foothill
Capital Corporation $15 million secured revolving credit facility, increasing it
to $25 million with a termination date of September 30, 1997 and providing for
the pledge of additional collateral, namely 65% of the shares of stock of DEA
S.p.A. and also the accounts receivables, inventories and certain other assets
of the United
<PAGE>
States subsidiary of DEA S.p.A. As of October 31, 1994 there were no borrowings
outstanding under the Foothill Capital Corporation secured revolving credit
facility (borrowings thereunder as of September 28, 1994 were repaid by the
Company).
Amounts outstanding under Brown & Sharpe's 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 October 31, 1994, Brown & Sharpe had
borrowings of $26.7 million under the lines of credit, compared to total
availability at that date of $30.7 million under the lines of credit, excluding
lines of credit for DEA which Brown & Sharpe expects to have available in an
amount of at least $15 million. As noted, no amounts were outstanding under the
Foothill facility. At October 31, 1994, Brown & Sharpe was required to maintain
an aggregate of $6.2 million in restricted cash balances to support certain of
the foreign lines of credit.
Management believes that the availability of borrowings, following
completion of the DEA acquisition and the new financing arrangements described
above, 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. The net loss of $8.9 million in the first nine months of
operations was offset by reduction in accounts receivable balances from year-end
levels which are typically higher because sales near the end of the year are
usually higher and by cash of $2.0 million provided by operations.
In the first nine months of 1994, investment transactions used cash of $3.2
million, of which capital expenditures were $2.0 million, whereas, investment
transactions used cash of $.9 million in the first nine months of 1993 with
proceeds from the sale of the spares and rebuild operations of $8.7 million
being partially offset by capital expenditures of $2.8 million and cash of $6.0
million became restricted in support of bank borrowings.
Cash provided from financing transactions was $22.3 million in the first
nine months of 1994 compared to $.5 million in the first nine months of 1993.
This resulted from the new financing described above.
Working Capital. Working capital was $111.5 million at the end of the
third quarter of 1994 compared to $46.0 million at the end of 1993. This change
resulted largely from the purchase of DEA which provided about $37.0 million of
working capital and the timing of sales during the respective periods with
higher sales in December of 1993 resulting in higher accounts receivable.
Inventories increased to $95.2 million at October 1, 1994, an increase of $41.2
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 and DEA at the end of the third quarter of 1994,
both using Brown & Sharpe Shares of Class A Common Stock. Also, debt increased
at October 1, 1994 as compared to December 25, 1993 due to debt of Roch and DEA
existing at their respective acquisition dates, increased borrowing to fund
operating losses and foreign currency exchange rate changes.
Capital Expenditures. Brown & Sharpe's capital expenditures were
approximately $2.0 million in the first nine months of 1994 compared to $2.8
million in the first nine months of 1993.
<PAGE>
Total capital expenditures for the Company are expected to increase as a
result of the completion of the DEA Acquisition. DEA capital expenditures
totaled $.8 million in the first nine months of 1994 compared to $1.2 million in
the first nine months 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, and DEA S.p.A.
and its subsidiaries were acquired in late September 1994. Proceeds from the
sale of the machine tool parts and rebuild operations completed during the first
half of 1993 provided $8.7 million of cash.
On September 28, 1994, Brown & Sharpe purchased from Finmeccanica S.p.A.
the 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
$112 million. Brown & Sharpe issued 3,450,000 shares of Brown & Sharpe Class A
Common Stock to Finmeccanica and DEA had about $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 entered
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. Under
the Shareholders' Agreement, Brown & Sharpe's Board of Directors is increased
from seven to ten and Finmeccanica has three representatives on the Brown &
Sharpe Board.
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A Special Stockholders' Meeting was held on Wednesday, September 28, 1994
at which the stockholders voted on a proposal to approve the issuance of shares
of the Company's Class A Common Stock, $1.00 par value to Finmeccanica S.p.A.
pursuant to the Acquisition Agreement dated as of June 10, 1994 and a
Shareholders' Agreement entered into at the closing under the Acquisition
Agreement between the Company and Finmeccanica.
The tabulation of votes on this proposal was as follows:
For Against Abstain
--- ------- -------
7,448,950 280,546 63,040
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. See Exhibit Index annexed.
B. No Reports on Form 8-K were filed during the quarter ended October 1, 1994.
On October 13, 1994, Brown & Sharpe filed a Current Report on Form 8-K
under Item 2 reporting the September 28, 1994 acquisition of all of the
stock of DEA S.p.A. from Finmeccanica S.p.A.
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)
November 15, 1994
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
3. Amendments to By-Laws of the Registrant, Sections 2.7, 3.1, and 3.2 as of
September 28, 1994.
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 Letter Agreement of Henry D. Sharpe, Jr. dated September 28, 1994 entered
into pursuant to the Acquisition Agreement (reference is made to Exhibit
No. 3 to Report on Form 8-K for the event which took place on September 28,
1994) filed October 13, 1994 which is hereby incorporated by reference.
11. Computation of Per Share Data for the forty week period ended October 1,
1994 and the thirty-nine week period ended September 25, 1993.
<PAGE>
EXHIBIT 3
---------
RESOLVED: That Section 2.7 of the By-Laws of this Corporation be amended in its
entirety to read as follows:
"2.7 QUORUM OF STOCKHOLDERS. Except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws, at any meeting of the
stockholders a quorum as to any matter shall consist of a majority of
the votes entitled to be cast on the matter, except that where a
separate vote by a class or classes or series thereof is required by
law, the Certificate of Incorporation or these By-Laws a majority of
the votes entitled to be cast by such class or classes (or series
thereof) shall constitute a quorum with respect to that matter. Any
stock of the corporation belonging to the corporation at the time of
any record date for meeting or any adjourned session thereof shall
neither be entitled to vote nor counted for quorum purposes; provided,
however, that this sentence shall not be construed as limiting the
right of the corporation to vote its own stock held by it in a
fiduciary capacity. Any meeting may be adjourned from time to time by
a majority of the votes properly cast upon the question, whether or
not a quorum is present."
VOTED: that Section 3.1 of the By-Laws of this Corporation be amended in its
entirety to read as follows:
"3.1 NUMBER. Except as otherwise provided in Section 3.2 below, there
shall be a Board of Directors composed of such number of directors,
not less than six nor more than ten as may from time to time be fixed
by the stockholders or by the directors and elected as provided by law
and by these By-Laws. Within the foregoing limits, the number of
directors may be increased to any number permitted by law at any time
or from time to time by the stockholders or by the directors. The
number of directors may be decreased to any number permitted by the
foregoing item at anytime either by the stockholders or by the
directors, but only upon the expiration of the term of office of any
director or to eliminate vacancies existing by reason of the death,
resignation or removal of one or more directors provided that any such
decrease shall not be inconsistent with the terms of that certain
Shareholders Agreement to be entered into by the Corporation in
connection with the Closing under that certain Acquisition Agreement
dated as of June 10, 1994 between the Corporation and Finmeccanica
S.p.A."
VOTED: that the fourth paragraph of Section 3.2 of the By-Laws of this
Corporation be deleted and that the third paragraph of Section 3.2 of
the By-Laws be amended in its entirety to read as follows:
"Any director elected to fill a vacancy caused by death, resignation
or removal shall be elected for a term which shall coincide with the
term of the class of the vacant directorship. Any director elected to
fill an additional directorship resulting from an increase in the
number of directors shall be elected to the class of directors having
the least number of directorships; provided, however, that if there is
-------- -------
more than one class having the least number of directorships such
additional director shall be elected to such of such classes the term
of which class continues until the Annual Meeting of Stockholders
closest to three years from the date of increase; and provided,
--------
further, that if each class has an equal number of directorships such
-------
additional director shall be elected to the class the term of which
class continues until the next Annual Meeting of Stockholders.
References herein to an annual meeting include any special meeting
later held in lieu thereof."
<PAGE>
EXHIBIT 11
----------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
COMPUTATION OF PER SHARE DATA
-----------------------------
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
Oct. 1, 1994 Sept. 25, 1993
------------ --------------
<S> <C> <C>
Computation of (loss):
Net (loss) used for computation
of primary earnings per share $ (8,857) $ (2,827)
Add interest expense, net of taxes,
assuming conversion of debentures 722 1,180
---------- ----------
Net (loss) used for computation
of fully diluted earnings per share $ (8,135) $ (1,647)
========== ==========
Computation of shares:
Weighted average number of common shares
outstanding during the period 5,192,982 4,968,978
Dilutive stock options -- --
---------- ----------
Weighted average number of common shares
used for computation of
primary earnings per share 5,192,982 4,968,978
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 5,802,505 5,616,597
========== ==========
Per common share:
Primary and fully diluted net (loss) per share $(1.71) $(.57)
====== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-START> Dec-26-1993
<PERIOD-END> Oct-01-1994
<EXCHANGE-RATE> 1
<CASH> 21,866
<SECURITIES> 0
<RECEIVABLES> 83,770
<ALLOWANCES> 4,075
<INVENTORY> 95,243
<CURRENT-ASSETS> 217,408
<PP&E> 130,171
<DEPRECIATION> 84,290
<TOTAL-ASSETS> 276,878
<CURRENT-LIABILITIES> 105,886
<BONDS> 73,878
<COMMON> 8,657
0
0
<OTHER-SE> 73,563
<TOTAL-LIABILITY-AND-EQUITY> 276,878
<SALES> 119,452
<TOTAL-REVENUES> 119,452
<CGS> 83,947
<TOTAL-COSTS> 39,849
<OTHER-EXPENSES> (446)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,459
<INCOME-PRETAX> (8,357)
<INCOME-TAX> 500
<INCOME-CONTINUING> (8,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,857)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>
