<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5881
------
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)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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; 12,206,407 shares of Class A
common stock, 517,768 shares of Class B common stock, par value $1 per share,
outstanding as of October 31, 1996.
1
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS*
- ------ --------------------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine-Months Ended Sept. 30,
-------------------------------- ------------------------------------
1996 1995 1996 1995
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $83,791 $78,571 $249,904 $236,920
Cost of sales 57,759 54,263 171,452 162,437
Selling, general and
administrative expense 22,971 21,781 68,075 68,361
Restructuring charges - 89 - 336
------- ------- -------- --------
Operating profit 3,061 2,438 10,377 5,786
Interest expense 2,031 2,787 6,584 6,735
Other income, net 151 569 320 959
------- ------- -------- --------
Income before income taxes 1,181 220 4,113 10
Income tax provision (benefit) (76) 0 452 200
------- ------- -------- --------
Net income (loss) $ 1,257 $ 220 $ 3,661 $ (190)
======= ======= ======== ========
Primary and fully diluted
income (loss) per common share:
Net income (loss) per share $ .14 $ .03 $ .41 $ (.02)
======= ======= ======== ========
Weighted average shares
outstanding and common
stock equivalents
during the period 8,885,696 8,779,246 8,884,669 8,692,584
</TABLE>
* The accompanying notes are an integral part of the financial statements.
2
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995
--------------- ------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,387 $ 6,262
Accounts receivable, net of allowances for
doubtful accounts of $2,947 and $3,030 122,728 113,579
Inventories 94,398 88,558
Deferred income taxes 3,996 3,322
Prepaid expenses and other current assets 5,490 5,436
-------- --------
Total current assets 231,999 217,157
Property, plant and equipment:
Land 6,916 7,141
Buildings and improvements 43,251 37,447
Machinery and equipment 91,717 95,482
-------- --------
141,884 140,070
Less-accumulated depreciation 87,796 87,183
-------- --------
54,088 52,887
Goodwill, net 11,130 11,529
Other assets 13,904 13,827
-------- --------
$311,121 $295,400
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
installments of long-term debt $ 67,585 $ 45,229
Accounts payable 52,125 44,936
Accrued expenses and income taxes 36,236 39,423
-------- --------
Total current liabilities 155,946 129,588
Long-term debt 40,849 56,839
Other long-term liabilities 6,755 6,310
Deferred income taxes 2,766 2,765
Unfunded accrued pension cost 5,805 5,823
Termination indemnities 8,858 8,218
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 8,243,718 shares in 1996
and 8,195,795 shares in 1995 8,244 8,196
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 519,299 shares in 1996
and 522,575 shares in 1995 519 523
Additional paid in capital 67,254 66,863
Earnings(deficiency) employed in the business (4,371) (8,032)
Cumulative foreign currency translation adjustment 19,110 18,926
Treasury stock: 42,592 shares in 1996 and
in 1995 at cost (455) (270)
Unearned compensation (159) (349)
-------- --------
Total shareowners' equity 90,142 85,857
-------- --------
$311,121 $295,400
======== ========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
3
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Months Ended Sept. 30,
-------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS:
Net income (loss) $ 3,661 $ (190)
Adjustment for Noncash Items:
Depreciation and amortization 5,934 7,482
Unfunded pension 327 314
Deferred compensation 189 -
Termination indemnities 287 196
Changes in Working Capital:
(Increase) Decrease in accounts receivable (11,313) 3,579
Increase in inventories (8,817) (4,939)
Increase in prepaid expenses and other current assets (143) (393)
Increase (decrease) in accounts payable and accrued expenses 3,820 (9,190)
-------- -------
Net Cash (Used in) Provided by Operations (6,055) (3,141)
-------- -------
INVESTMENT TRANSACTIONS:
Capital expenditures (7,675) (5,372)
Other investing activities (271) 293
-------- -------
Cash (Used in) Investment Transactions (7,946) (5,079)
-------- -------
FINANCING TRANSACTIONS:
Increase in short-term debt 7,915 7,943
Proceeds from issuance of long-term debt 2,979 -
Principal payments of long-term debt (2,855) (3,076)
Other financing activities 250 557
-------- -------
Cash Provided by Financing Transactions 8,289 5,424
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,837 1,131
-------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the period (875) (1,665)
Beginning balance 6,262 6,676
-------- -------
Ending balance $ 5,387 $ 5,011
======== =======
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 5,339 $ 4,629
======== =======
Taxes paid $ 685 $ 1,703
======== =======
</TABLE>
* The accompanying notes are an integral part of the financial statements.
4
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in Thousands)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter and nine-month period ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Brown & Sharpe Manufacturing Company's annual report on Form 10-K for the
year ended December 31, 1995.
2. Cash and cash equivalents are comprised of cash-on-hand deposits in banks
and short-term marketable securities with a maturity at acquisition of
three months or less. Cash also includes $1.4 million of cash pledged to
support bid bonds and performance bonds issued by a bank.
3. The composition of inventory is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
Parts, raw materials, and supplies $39,816 $39,857
Work in process 16,758 15,906
Finished goods 37,824 32,795
------- -------
$94,398 $88,558
======= =======
</TABLE>
4. Income taxes include provisions for federal, foreign and state income taxes
and are based on the Company's estimate of effective income tax rates for
the full year. The tax provision for the first nine-months of 1996 and
1995 is $452 and $200, respectively.
The estimate of the 1996 effective tax rate was revised during the three
month period ended September 30, 1996, reflecting a reduction in projected
taxable income in certain foreign jurisdictions where tax expense was
previously anticipated. As a result of the change in the estimated
effective rate, net income for the three months ended September 30, 1996
increased $289 ($.03 per share).
5. Primary and fully diluted earnings per share for the quarter and nine-
months ended September 30, 1996 is based upon the weighted average number
of common shares outstanding and common stock equivalents. For the quarter
ended September 30, 1995, earnings (loss) per share was based upon the
weighted average number of common shares outstanding and common stock
equivalents. For the nine-months ended September 30, 1995, earnings (loss)
per share was based upon the weighted average number of common shares
outstanding since inclusion of common stock equivalents would be
antidilutive.
6. Labor Relations. The Company is involved in litigation stemming from an
October 1981 strike by employees represented by the International
Association of Machinists and Aerospace Workers ("IAM") at the Company's
Rhode Island operations. Following the strike, the IAM filed charges with
the National Labor Relations Board ("NLRB") alleging that the Company
engaged in unfair labor practices which precipitated the strike. On August
28, 1990, the NLRB dismissed the IAM's charges. The IAM appealed this
decision to the U.S. Court of Appeals for the District of Columbia Circuit.
On November 29, 1991, the Court accepted the legal reasoning advanced by
the NLRB and the Company in support of the NLRB's 1990 decision, but
ordered the NLRB to
5
<PAGE>
further clarify and support its decision. The NLRB reaffirmed its original
dismissal of the IAM's charges, and the IAM appealed that decision. The
Court, on April 7, 1995, vacated the NLRB's earlier decision favorable to
the Company and remanded the case to the NLRB for a decision on whether the
charges should be dismissed or a trial on the merits should proceed. On
August 16, 1996, the NLRB issued a second supplemental decision and order
finding in favor of the Company and dismissed the IAM complaint. The IAM
has filed a motion with the NLRB requesting a re-hearing and
reconsideration of its ruling. Should the motion be denied, the IAM could
once again appeal such ruling to the U.S. Court of Appeals. The Company
will continue to defend this case vigorously and, management continues to
believe that the possibility of an adverse decision in this matter is
remote. If the case were ultimately decided against the Company, the
Company could be liable for back wages, subject to mitigation for certain
statutory offsets, for all union members whose strike is based on such
alleged unfair labor practices.
Environmental. The Company is involved in a lawsuit which arose out of an
environmental proceeding in which the United States Environmental
Protection Agency ("EPA") identified the Company as a potentially
responsible party ("PRP") at a waste disposal site (the "Site") in Rhode
Island listed on the EPA's National Priority List for clean-up and future
monitoring remedial action under the Superfund legislation. The Company's
proportionate share of the total waste contributed to the Site was minimal
in volume and toxicity, and the Company was permitted by the EPA to settle
its liability at such Site in exchange for releases from the EPA and the
State of Rhode Island and for contribution protection from claims of any
third parties who may have liability at the Site. A group of non-settling
major PRPs at the Site brought suit in the Federal District Court in Rhode
Island on January 2, 1991 against all of the settling parties, including
the Company, to recover a portion of their past and anticipated future
costs of performing the clean-up remedy. The Court entered a summary
judgment in favor of the Company and other settling parties on October 30,
1992. The non-settling group of major PRPs appealed that ruling and
brought suit against the EPA seeking to have the settlements of the de
minimis settling parties set aside. The Company is vigorously defending
this lawsuit and believes that given the release and contribution
protection obtained from the EPA in connection with settlement of its
liability at the Site, the cost-recovery claim will ultimately be barred.
On March 1, 1995, the Company received a notice from the State of New York
asserting a claim against it, along with a group of approximately ten other
companies, to recover costs incurred by the New York State Department of
Environmental Conservation to clean up a waste disposal site in
Poughkeepsie, New York. The State has alleged that the Company's former
subsidiary, Standard Gage Company, Poughkeepsie, New York, acquired in 1987
and merged with and into the Company in 1991, contributed hazardous waste
to the site for disposal and that the Company is a PRP as the surviving
corporation to the merger. The total claim asserted by the State against
all parties is approximately $500,000, and it has expressed a willingness
to settle its claim with all PRPs receiving the notice. The Company is
continuing to investigate the basis for this claim and estimates that any
potential loss it might incur as a result of any involvement or settlement
at this site would not be material.
Product Liability and Other Litigation Incidental to the Business. The
Company is involved in a number of product liability claims and lawsuits by
plaintiffs seeking monetary damages for personal injury which arose out of
and were incidental to the sale of products manufactured by the Company in
its discontinued metal cutting machine tool and hydraulic businesses and
certain other litigation and claims incidental to the conduct of its
business. The potential liability of the Company for these claims and
suits is adequately covered by insurance or reserves established for such
contingencies. The Company is contesting or defending these claims and
suits and management believes that the ultimate liability, if any,
resulting from these matters will not have a material effect on the
Company's financial position.
7. During the third quarter of 1996, the Company recognized net income of a
$0.2 million ($.02 per share) arising from the reacquisition of common
stock that represents the reimbursement of
6
<PAGE>
expenses that resulted from the 1994 acquisition of the Roch business from
Diehl as provided for in the warranty provision of the Acquisition
Agreement between the Company and Diehl.
8. Subsequent Events. During October, the Company completed a public offering
in which it issued 4,424,321 shares of Class A common stock which resulted
in net proceeds of $48.9 million. For additional information on the public
offering, reference is made to the Company's Registration Statement on Form
S-1 No. 333-1075, which became effective on October 10, 1996.
The following is a Pro Forma Balance Sheet assuming the pubic offering and
application of $33.5 million of the $48.9 million of net proceeds from the
offering were used to pay notes payable and a portion of current
installments of long-term debt had occurred on September 30, 1996:
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,965
Accounts receivable 122,728
Inventories 94,398
Other current assets 9,486
--------
Total current assets 246,577
Property, plant and equipment, net 54,088
Other assets 25,034
--------
$325,699
========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ 33,944
Accounts payable and other 88,361
--------
Total current liabilities 122,305
Long-term debt and other liabilities 65,033
SHAREOWNERS' EQUITY:
Common stock 13,187
Additional paid in capital 111,049
Earnings (deficiency) employed in the business (4,371)
Other equity items 18,496
--------
Total shareowners' equity 138,361
--------
$325,699
========
</TABLE>
The following shows Pro Forma Results of Operations for the nine-months
ended September 30, 1996 assuming that the public offering described above
had occurred on January 1, 1996:
Pro Forma
Results of Operations
---------------------
Net Income $5,922
Net Income Per Share $.46
7
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
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 nine-
months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Quarters Ended Sept. 30 Nine-Months Ended Sept. 30
------------------------- ----------------------------
1996 1995 1996 1995
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.9 69.1 68.6 68.6
Selling, general and administrative expense 27.4 27.7 27.2 28.9
Restructuring charges 0.0 0.1 0.0 0.1
----- ----- ----- -----
Operating profit 3.7 3.1 4.2 2.4
Interest expense 2.4 3.5 2.6 2.8
Other income (expense), net 0.2 0.7 0.1 0.4
----- ----- ----- -----
Income before income taxes 1.5 0.3 1.7 0.0
Income tax provision (benefit) (0.1) 0.0 0.2 0.1
----- ----- ----- -----
Net income (loss) 1.6% 0.3% 1.5% (0.1)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
(Quarter Ended September 30, 1996 compared to Quarter Ended September 30, 1995)
NET SALES. Net sales in the third quarter of 1996 increased 6.6% to $83.8
million, from $78.6 million in the third quarter of 1995. Foreign currency
exchange rate fluctuations caused a decrease, on a dollar denominated basis, in
net sales in the third quarter of 1996 of $1.8 million as compared to the third
quarter of 1995. When translated at 1995 foreign exchange rates, third quarter
1996 net sales increased approximately $7.0 million or 9.0% from third quarter
1995 sales. The $7.0 million increase is comprised of a $7.4 million increase
in Measuring Systems Division ("MS"), a $0.6 million increase in Precision
Measuring Instruments Division ("PMI"), and $1.0 million decrease in the Custom
Metrology Division ("CM") and other miscellaneous sales. The increase in MSD
net sales was largely due to sales of the smaller machines manufactured in the
U.S., as well as increased sales of more fully configured machines with higher
sales prices than the prior period. The increase in PMI Division net sales was
primarily due to increased unit volume in the United States that was partially
offset by a decrease in volume in other markets. The decrease in CM Division
net sales was due to reduced sales of special gauging machines.
GROSS PROFIT. Gross profit increased 7.0% from $24.3 million in the third
quarter of 1995 to $26.0 million in the third quarter of 1996. As a percentage
of net sales, gross profit margin increased to 31.1% of sales in the third
quarter of 1996 from 30.9% in the third quarter of 1995. MSD's margin increased
in 1996 but was offset by a decrease in PMI and CM margins. The MS Group's
margin increased due to improved product mix, which was partially caused by
increased sales of more fully configured machines with higher sales value. In
addition, increased revenue from after-market service contributed to the
improved margin at MSD. Partially offsetting those increases was PMI's
decreased profit margin. The PMI decrease resulted from a planned reduction of
inventory levels which resulted in reduced production levels, less fixed
overhead cost absorption, and lower margin in the third quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense ("SG&A") in the third quarter of 1996 was $23.0 million
or 27.4% of net sales, representing an increase from $21.8 million or 27.7% of
net sales in the comparable period in 1995. Exclusive of foreign currency
transaction losses, which amounted to a $0.1 million loss in 1996 and $1.3
million loss in 1995, SG&A increased from 26.1% of sales in 1995 to 27.3% of
sales in 1996. MSD and PMI's SG&A increased $1.2 million
8
<PAGE>
while CM's SG&A decreased $0.1 million compared to the third quarter of 1995.
MSD's change was due, in part, to increased sales commissions, while PMI's
increase was due to various increased expenses.
OPERATING PROFIT (LOSS). As a result of the foregoing, operating profit
increased 29.2%, or $0.7 million, from $2.4 million in the third quarter of 1995
to $3.1 million in the third quarter of 1996.
INTEREST EXPENSE. Interest expense decreased 28.6%, or $0.8 million, from $2.8
million in the third quarter of 1995 to $2.0 million in the third quarter of
1996. The decrease reflects lower average interest rates offset by increased
average borrowings of $5.5 million in the third quarter of 1996 over borrowings
in the third quarter of 1995, which resulted from additional working capital
requirements and financing for the CM Division's new facility in Telford,
England.
INCOME TAX EXPENSE. Income taxes include provisions for federal, foreign and
state income taxes and are based on the Company's estimate of the effective
income tax rates for the full year. The estimated 1996 effective tax rate
amounted to 11.0% which compared with the effective tax rate of 26.6% for the
year ended December 31, 1995. The reduction in the effective tax rate in 1996
from the year ended December 31, 1995 is attributable to income earned in tax
jurisdictions in which net operating loss carryforwards will be recognized in
1996.
During the third quarter, the 1996 estimated annual effective tax rate has been
revised from 18%, which was used for the six month period ended June 30, 1996,
to 11%, reflecting a reduction in projected taxable income in certain foreign
jurisdictions where tax expense was previously anticipated. The change in the
estimated effective tax rate increased net income in the third quarter of 1996
by $0.3 million ($.03 per share).
NET INCOME (LOSS). As a result of the preceding factors, the Company had net
income of $1.3 million ($.14 per share) in the third quarter of 1996 compared to
a net income of $0.2 million ($.03 per share) in the third quarter of 1995.
RESULTS OF OPERATIONS
(Nine-Months Ended September 30, 1996 compared to Nine-Months Ended September
30, 1995)
NET SALES. Net sales in the first nine-months of 1996 increased 5.5% or $13.0
million over the first nine-months of 1995, increasing from $236.9 million in
1995 to $249.9 million in 1996. Foreign currency exchange rate fluctuations
caused a decrease in net sales of $3.4 million in the first nine-months of 1996
as compared to the first nine-months of 1995. Excluding these foreign currency
effects, net sales increased $16.4 million over the first nine-months of 1995.
The MS Group was responsible for $13.5 million of the $16.4 million increase,
and approximately $3.0 million of the increase came from the PMI Division. The
increase was largely due to shipments of the smaller machines manufactured in
the U.S., as well as increased sales of more fully configured machines with
higher sales prices than the prior period. PMI Division sales increased due to
increased unit volume in the United States and price increases worldwide.
GROSS PROFIT. Gross profit increased $4.0 million, or 5.4%, from $74.5 million
in the first nine-months of 1995 to $78.5 million in the first nine-months of
1996. As a percentage of net sales, gross profit margin was 31.4% in the first
nine-months of 1996 and 1995, over which period the MS Group margin and the PMI
Division's margin remained approximately the same while the CM Division's margin
increased slightly.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense ("SG&A") as a percentage of net sales decreased to 27.2%
in the first nine-months of 1996 from 28.9% in the first nine-months of 1995.
Exclusive of foreign currency transaction gains or losses, which amounted to a
$0.8 million loss in 1996 and a $0.6 million gain in 1995, SG&A decreased as a
percentage of net sales from 29.1% of sales in 1995 to 26.9% of sales in 1996.
PMI's SG&A increased $0.8 million while the MS Group's SG&A decreased $1.3
million compared to the same period in 1995. PMI's increase
9
<PAGE>
is due, in part, to a restructuring charge. The decrease in SG&A for the MS
Group as a percentage of net sales was primarily attributable to reduced
advertising and administrative expenses offset in part by increased sales
commissions.
OPERATING PROFIT. As a result of the foregoing, operating profit increased
79.3%, or $4.6 million, from $5.8 million for the nine months of 1995 to $10.4
million in the nine months of 1996.
INTEREST EXPENSE. Interest expense decreased $0.1 million, in the first nine-
months of 1996 over interest expense in the first nine-months of 1995,
decreasing from $6.7 million to $6.6 million. Average borrowings increased $6.6
million over the comparable period in 1995, which resulted from additional
working capital requirements and financing for a new facility in Telford,
England, and were offset by a decrease in average interest rates.
INCOME TAX EXPENSE. Income taxes include provisions for federal, foreign and
state income taxes and are based on the Company's estimate of the effective
income tax rates for the full year. The estimated 1996 effective tax rate
amounted to 11.0% which compared with the effective tax rate of 26.6% for the
year ended December 31, 1995. The reduction in the estimated effective tax rate
in 1996 from the year ended December 31, 1995 is attributable to income earned
in tax jurisdictions in which net operating loss carryforwards will be
recognized in 1996.
NET INCOME (LOSS). As a result of the preceding factors, the Company had net
income of $3.7 million ($.41 per share) in the first nine-months of 1996
compared to a net loss of $0.2 million ($.02 per share) in the first nine-months
of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Over the last several years, the Company has funded its working capital, capital
expenditure, research and development and other cash needs from operating cash
flows, proceeds from the sale of discontinued businesses, borrowings under
credit facilities and an aggregate of $33.5 million of term and mortgage
indebtedness incurred in 1994. At September 30, 1996 the Company's outstanding
indebtedness was $108.4 million including $74.9 million of long term
indebtedness (including current portion) and $33.5 million of short-term
borrowings. Short term borrowings consisted of $16.6 million of borrowings
pursuant to a renewable secured three-year revolving credit facility, originally
entered into on June 30, 1993, (the "Facility") and $16.9 million of borrowings
pursuant to foreign credit facilities. The Company's cash and cash equivalents
were $5.4 million including restricted cash of $1.4 million. During the first
six months of 1996, the Company refinanced $12.2 million of Swiss mortgages
which now mature June 2000 and June 2001. The Facility provides for maximum
aggregate borrowing of $25.0 million and is a renewable, secured, revolving
credit facility which is provided by a domestic financial institution. Foreign
credit facilities provide for maximum aggregate borrowings of $48.3 million.
The Facility is available for working capital and general corporate purposes and
$23.0 million of foreign credit facilities are available for working capital and
general corporate purposes in the countries in which the loan was originated by
the local subsidiary, $19.6 million of the foreign credit facilities are
available on presentment of eligible invoices for discounting and $5.7 million
of the foreign credit facilities are available to support letters of credit and
performance and bid bonds. Actual availability under the Facility is limited on
the basis of eligible United States accounts receivable and inventory. At
September 30, 1996, giving effect to such borrowing base limitations and
outstanding borrowings, but prior to the public offering of common stock of the
Company completed in October, 1996, the Company's maximum available additional
borrowings under the Facility were $3.3 million and its maximum available
additional borrowings under its foreign credit facilities were $28.4 million.
The commitments under the Facility continue until September 1997 and
automatically renew thereafter for one year periods, subject to the termination
provisions contained in the Facility. The Facility is secured by substantially
all of the Company's domestic assets and shares in some of its foreign
subsidiaries and contains a number of covenants, including the obligations to
maintain certain financial ratios and a prohibition on the payment of dividends.
The Company's foreign credit facilities are generally due on demand and certain
of such facilities are secured by certain of the Company's foreign
10
<PAGE>
assets. An aggregate of $25 million of term indebtedness incurred by the Company
in 1994 (and guaranteed by Finmeccanica) will mature in September 1997. On March
30, 1996, June 30, 1996, and September 30, 1996, the Company breached the
current ratio covenant contained in the Facility. Such breaches were waived.
There can be no assurance that the Company will not breach this covenant in the
future.
The Company's growth during 1995 and the first nine months of 1996 has increased
its working capital requirements. In order to fund such increased working
capital requirements, during the first nine months of 1996, the Company
restricted planned capital expenditures and funding for certain other projects
planned to achieve cost reductions and growth.
In October 1996, the Company completed an underwritten public offering in which
it sold 4,424,321 newly issued shares of Class A common stock for net proceeds
amounting to $48.9 million. Immediately thereafter, the Company paid off its
entire short-term borrowings and some current portion of long-term debt, other
than the $25 million (guaranteed) term debt which became short term during
September, 1996, amounting to $33.5 million and invested the balance of cash
received from the stock offering in short-term securities, which is available
for working capital and capital expenditures.
CASH FLOW. Net income of $3.7 million for the first nine months of 1996
increased by depreciation and other non-cash items amounting to $6.7 million and
offset by increases in working capital amounting to $16.5 million resulted in
operations in the first half of 1996 using $6.1 million of cash. In the first
nine months of 1995, increased working capital of $10.9 million resulted in $3.1
million of cash being used by operations.
In the first nine months of 1996, investment transactions used cash of $7.9
million, of which capital expenditures were $7.7 million, as compared with
depreciation of $4.8 million in the first nine months of 1996. This compares to
investment transactions using cash of $5.1 million in the first nine months of
1995 of which capital expenditures amounted to $5.4 million and depreciation
amounted to $6.7 million.
Cash provided from financial transactions was $8.3 million in the first nine
months of 1996 compared with $5.4 million in the first nine months of 1995.
1996 financial transactions consisted of a $7.9 million increase in short-term
borrowings and $3.0 million of long-term debt to finance the Telford facility
described below and the repayment of $2.9 million of long-term debt. 1995
financing transactions included $7.9 million of short-term borrowings offset by
$3.1 million of long-term debt payments.
WORKING CAPITAL. Working capital was $76.1 million at the end of the first nine
months of 1996 compared to $87.6 million at the end of 1995. Inventories
increased to $94.4 million at September 30, 1996, an increase of $5.8 million
from the end of 1995, and accounts receivable increased to $122.7 million from
year end 1995. Also, notes payable and current installments of long-term debt
increased $22.4 million, which resulted from a reclassification to current
status of $25.0 million of long-term debt that is payable in September 1997 and
net increased borrowings of notes payable and current installments of long-term
debt of $5.1 million offset by reductions in notes payable and current
installments of long-term debt of $7.7 million due to foreign exchange
fluctuations.
CAPITAL EXPENDITURES. The Company's capital expenditures, net of disposal
proceeds, were approximately $7.7 million in the first nine months of 1996, of
which $4.2 million was for the new facility in England, compared to $5.4 million
in the first nine months of 1995. Management estimates that capital
expenditures for the remainder of 1996 will amount to approximately $3.0
million. Amounts spent on capital expenditures have been less than planned and
may increase in the future.
11
<PAGE>
PROSPECTIVE INFORMATION
This section includes certain forward-looking statements about the Company's
sales, expenditures and cost savings, operating and capital requirements and
refinancings. Any such statements are subject to risks that could cause the
actual results or needs to vary materially. These risks are discussed in "Risk
Factors" in the Company's Report on Form 10-K for the year 1995.
12
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
- ------ -----------------
On August 16, 1996, the National Labor Relations Board ("NLRB") issued a second
supplemental decision and order finding in favor of the Company and dismissing
unfair labor practice charges filed against the Company by the International
Association of Machinists and Aerospace Workers ("IAM") relating to a strike by
employees represented by the IAM at the Company's Rhode Island operations in
October of 1981. The IAM has filed a request for re-hearing and reconsideration
of the NLRB's decision and it has a right of appeal of the decision to the U.S.
Court of Appeals should such request be denied. See footnote 6, Labor Relations
to Part I Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
A. See Exhibit Index annexed.
B. No Form 8-K was filed during the quarter ended September 30, 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN & SHARPE MANUFACTURING COMPANY
By: /s/ Charles A. Junkunc
----------------------
Charles A. Junkunc
Vice President and Chief Financial Officer
(Principal Financial Officer)
November 13, 1996
13
<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.
10.77 Amendment dated September 12, 1996 to Richard F. Paolino's employment
agreement.
11. Computation of Per Share Data for the nine-month periods ended September
30, 1996 and 1995.
14
<PAGE>
EXHIBIT 10.77
-------------
AMENDMENT
Amendment dated as of September 12,1996 to Employment Agreement dated March
14, 1988 (the "Employment Agreement") between Richard F. Paolino, residing at 16
Quincey Adams Road, Barrington, RI 02806 (the "Executive") and Brown & Sharpe
Manufacturing Company, a Delaware corporation, with its principal place of
business at 200 Frenchtown Road, North Kingstown, RI 02852 (the "Company").
WHEREAS, the parties wish to make certain clarifying amendments to the
Employment Agreement.
NOW THEREFORE, in consideration of these premises and the mutual promises,
terms, provisions and conditions set forth below, the parties agree to the
following amendments of the Employment Agreement:
1. The parties agree that if the Executive were to resign today, he would
be entitled to treat his resignation as a "deemed termination" of his employment
by the Company within the meaning of Section 4.4 of the Employment Agreement.
2. The parties agree that fundamental principles of the Employment
Agreement as to severance and related matters shall apply and further agree that
in order to provide for a clear understanding of the rights and obligations of
the parties with respect to severance and related benefits upon a termination of
employment and to reflect the amendments, the following is agreed to set for the
current employment, salary, bonus and benefits for employment of the Executive
after the date hereof and also the severances, benefits and other financial
provisions which shall be applicable to a termination of the Executive's
employment by resignation of the Executive or a termination by the Company
(other than a termination by the Company for cause), and including without
limitation a "deemed termination", shall be as follows:
a. The Executive is entitled to monthly salary, payable in accordance with
the Company's regular practice, at not less than the current annual rate
and fringe benefits which shall be paid through the date of termination
of the Executive's employment at any time up through September 28, 1997.
b. The Executive is entitled to bonus payable in respect of the year 1996
at the higher of the amount payable under the PIP or the amount
calculated as a percentage of base salary equal to the average of
bonuses paid to him (including cash paid under the PIP) in respect of
the 1993, 1994, and 1995 fiscal years.
c. Contributions for the benefit of the Executive under the SARP and under
the ESOP shall be made through the date of such termination of
employment, and in addition through December 31, 1997 so long as the
Executive is an employee on January 3, 1997 (and in that event computed
as if the Executive had continued in employment at the current base
salary rate through December 31, 1997). The Executive shall also be
entitled to, together with his dependents and beneficiaries, participate
in all life insurance plans, accident and health plans and other welfare
plans maintained or sponsored by the Company.
d. In addition, the Executive shall be entitled to a lump sum cash payment
upon such termination of employment, payable within 30 days, equal to
the sum of his highest annual base salary during the three year period
immediately preceding the date of such termination of employment, the
value of annual fringe benefits on the W-2 and the highest cash bonus
received from the Company for any of the three fiscal years of the
Company immediately preceding the date of such termination of
employment.
<PAGE>
e. All stock options (other than 30,000 options granted in July, 1995) or
restricted stock shall receive accelerated vesting. The stock options
for 30,000 shares granted to the Executive in July 1995 shall receive
accelerated vesting if the Executive remains an employee of the Company
through January 3, 1997 (unless his employment has been terminated prior
thereto by the Company for cause). The Executive shall not be entitled
to any accelerated vesting under the Long Term Deferred Cash Incentive
Plan upon any termination of employment. The Executive shall be
entitled to additional stock grants only in the sole discretion of the
Company.
3. The Executive shall be entitled to the severance and benefits set forth
above with respect to a termination of employment by resignation of the
Executive or a termination by the Company (other than a termination of
employment by the Company for cause) at any time prior to September 28, 1997
(except as specifically otherwise provided with respect to the vesting options
above). Nothing in the Employment Agreement or this Amendment shall govern the
severance, fringes and benefits, etc. with respect to a termination of
employment of the Executive taking place after September 28, 1997, and all
salary, bonus, fringes and other benefits, including severance, with respect to
any employment after September 28, 1997, shall be governed exclusively by such
subsequent agreement as may be reached by the Company and the Executive relating
to such period.
4. The Executive shall be bound by the covenant not to compete in the form
previously set forth in the Employment Agreement during his period of employment
by the Company and for one year following the date of termination of employment.
In the event the Executive dies following a termination of employment which
entitled him to the above payments and benefits but prior to receipt of all such
payments and benefits, the principles of the Employment Agreement shall apply,
namely, his beneficiary (as designated to the Company by letter) or, if none,
his estate, will be entitled to receive all of the above amounts and benefits
due but unpaid and his beneficiary or estate will be entitled to exercise
options in accordance with the terms of the options and the Employment Agreement
as amended by this Amendment.
5. It is confirmed that the provisions of Articles 6 through 12 of the
Employment Agreement shall remain applicable and that the provisions of Article
5 are deleted.
6. The Executive shall be entitled to use the EAP services of the Company
for twelve months from the date of such termination of employment in connection
with his employment outplacement. The Executive shall also have access, on
terms to be mutually agreed between the Executive and the Company's Chief
Financial Officer, to secretarial services, either with the Company or outside,
in connection with his employment outplacement activities for up to twelve
months from the date of such termination of employment and shall be reimbursed
for telephone bills of a second phone in his home, for business use, for such
period.
IN WITNESS WHEREOF, the Company and the Executive has each caused this
Amendment to the Employment Agreement to be duly executed and delivered as of
the date set forth above.
EXECUTIVE BROWN & SHARPE MANUFACTURING COMPANY
/s/ Richard F. Paolino By: /s/ Frank T. Curtin
- ---------------------- ----------------------------------------
Richard F. Paolino
<PAGE>
EXHIBIT 11
----------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
COMPUTATION OF PER SHARE DATA
-----------------------------
(Amounts in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended Sept. 30 Nine-Months Ended Sept. 30
---------------------- ---------------------------
1996 1995 1996 1995
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 8,729 8,695 8,735 8,693
Net effect of dilutive stock options
-- based on the treasury stock method
using average market price 157 85 149 -
------ ------ ------ ------
Totals 8,886 8,780 8,884 8,693
====== ====== ====== ======
Net income (loss) $1,257 $ 220 $3,661 $ (190)
====== ====== ====== ======
Per share amount $ .14 $ .03 $ .41 $ (.02)
====== ====== ====== ======
Fully diluted:
Average shares outstanding 8,729 8,695 8,735 8,693
Net effect of dilutive stock options
-- based on the treasury stock
method using ending market
price which is greater than
average market price 201 148 201 -
Assumed conversion of 9 1/4%
convertible subordinated
debentures * * * *
------ ------ ------ ------
Totals 8,930 8,843 8,936 8,693
====== ====== ====== ======
Net income (loss) $1,257 $ 220 $3,661 $ (190)
Add 9 1/4% convertible
subordinated debenture
interest, net of federal
income tax effect * * * *
------ ------ ------ ------
Totals $1,257 $ 220 $3,661 $ (190)
====== ====== ====== ======
Per share amount $ .14 $ .03 $ .41 $ (.02)
====== ====== ====== ======
</TABLE>
* Conversion of the 9-1/4% convertible subordinated debentures is not assumed in
the computation because its effect is anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 5,387
<SECURITIES> 0
<RECEIVABLES> 125,675
<ALLOWANCES> (2,947)
<INVENTORY> 94,398
<CURRENT-ASSETS> 9,586
<PP&E> 141,884
<DEPRECIATION> 87,796
<TOTAL-ASSETS> 311,121
<CURRENT-LIABILITIES> 155,946
<BONDS> 0
0
0
<COMMON> 8,763
<OTHER-SE> 81,379
<TOTAL-LIABILITY-AND-EQUITY> 311,121
<SALES> 249,904
<TOTAL-REVENUES> 249,904
<CGS> 171,452
<TOTAL-COSTS> 171,452
<OTHER-EXPENSES> 67,755
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,584
<INCOME-PRETAX> 4,113
<INCOME-TAX> 452
<INCOME-CONTINUING> 3,661
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,661
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
