<PAGE>
UNITED STATES
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, 1999
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; 12,966,556 shares of Class A
common stock, 505,889 shares of Class B common stock, par value $1 per share,
outstanding as of September 30, 1999.
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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,
--------------------------------- ------------------------------------
1999 1998 1999 1998
--------------- ---------------- ------------------ ----------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Sales $72,712 $75,427 $236,778 $244,781
Cost of sales--Note 2 50,878 50,587 169,061 164,251
Research and development expense 2,427 2,917 7,202 8,570
Selling, general and
administrative expense 20,196 19,077 64,347 61,296
Restructuring charges--Note 2 824 -- 18,026 --
------- ------- -------- --------
Operating (loss) profit (1,613) 2,846 (21,858) 10,664
Interest expense 1,911 1,484 4,947 4,410
Other income (expense), net 27 63 61 605
------- ------- -------- --------
(Loss) Income before income taxes (3,497) 1,425 (26,744) 6,859
Income tax provision (benefit) (986) 313 (632) 1,573
------- ------- -------- --------
Net (loss) income $(2,511) $ 1,112 $(26,112) $ 5,286
======= ======= ======== ========
Net (loss) income
per common share:
Basic and diluted $ (.19) $ .08 $ (1.94) $ .39
======= ======= ======== ========
Weighted average shares
outstanding 13,464,863 13,584,347 13,445,139 13,558,983
========== ========== ========== ==========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Sept. 30, 1999 December 31, 1998
--------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,415 $ 12,290
Accounts receivable, net of allowances for
doubtful accounts of $3,836 and $3,657 91,988 102,506
Inventories 83,808 88,391
Deferred income taxes 3,165 3,165
Prepaid expenses and other current assets 4,557 3,692
-------- --------
Total current assets 202,933 210,044
Property, plant and equipment:
Land 6,752 6,797
Buildings and improvements 42,935 43,919
Machinery and equipment 96,213 96,070
-------- --------
145,900 146,786
Less-accumulated depreciation 91,147 93,293
-------- --------
54,753 53,493
Goodwill, net 10,884 7,961
Other assets 40,481 46,280
-------- --------
$309,051 $317,778
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 43,622 $ 42,153
Accrued expenses and income taxes 51,573 48,045
Notes payable and current
installments of long-term debt--Note 8 86,757 9,272
-------- --------
Total current liabilities 181,952 99,470
Long-term debt 12,622 65,433
Long-term liabilities 22,732 23,220
SHAREOWNERS' EQUITY:
Preferred stock, $1 par value;
authorized 1,000,000 shares - -
Common stock:
Class A, par value $1; authorized 30,000,000
shares; issued and outstanding 13,009,148 shares
in 1999 and 12,926,385 shares in 1998 13,009 12,926
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 505,889 shares in 1999
and 507,809 shares in 1998 506 508
Additional paid in capital 113,085 112,508
Retained earnings (deficit) (27,472) (1,360)
Accumulated other comprehensive (loss) income (6,928) 5,528
Treasury stock: 42,592 shares in 1999 and
in 1998 at cost (455) (455)
-------- --------
Total shareowners' equity 91,745 129,655
-------- --------
$309,051 $317,778
======== ========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Months Ended Sept. 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS:
Net (loss) income $(26,112) $ 5,286
Adjustment for Noncash Items:
Restructuring charges 15,784 --
Depreciation and amortization 8,548 8,219
Unfunded pension 2,047 272
Termination indemnities 303 60
Changes in Working Capital:
Decrease in accounts receivable 8,230 3,317
Increase in inventories (5,646) (8,198)
(Increase) Decrease in prepaid expenses
and other current assets (1,068) 603
Increase (Decrease) in accounts payable
and accrued expenses 4,144 (258)
-------- --------
Net Cash Provided by Operations 6,230 9,301
-------- --------
INVESTMENT TRANSACTIONS:
Capital expenditures (7,253) (6,846)
Sale of an investment 76 891
Acquisition, net of cash acquired (9,241) --
Investment in other assets (4,120) (5,853)
-------- --------
Cash (Used in) Investment Transactions (20,538) (11,808)
-------- --------
FINANCING TRANSACTIONS:
Increase in short-term debt 28,223 --
Principal payments of long-term debt (2,513) (2,374)
Exercise of stock options -- 696
-------- --------
Cash Provided by (Used in) Financing Transactions 25,710 (1,678)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,277) 1,539
-------- --------
CASH AND CASH EQUIVALENTS:
Increase (Decrease) during the period 7,125 (2,646)
Beginning balance 12,290 20,458
-------- --------
Ending balance $ 19,415 $ 17,812
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 2,951 $ 2,978
======== ========
Taxes paid $ 1,144 $ 1,290
======== ========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
Page 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 ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. 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, 1998.
2. As part of an ongoing review of the Company's overall cost structure, the
Company announced in the first and second quarters, respectively, the
restructuring of its Custom Metrology ("CM") and Precision Measuring
Instruments ("PMI") divisions at various locations in the United Kingdom
and Measuring Systems Division ("MS"). The purpose of these restructurings
was to reduce costs and improve profitability through factory focus
missions and product line rationalization.
As a result of the restructurings, the Company recorded, in the first nine
months of 1999, restructuring related charges, net of taxes, amounting to
$25.8 million ($1.92 per share) of which $1.0 million ($.08 per share)
applied to the third quarter and the remainder to the first six months of
the period. The charges provide for costs associated with involuntary
employee termination benefits for most of the affected 342 employees,
write-down of excess inventory to net realizable value, write- down of
impaired fixed assets and capitalized software costs, and other exit costs,
such as legal expense, lease cancellations, travel, etc. The inventory
adjustment of $8.2 million has been classified in the nine months results
($0.2 million for the third quarter) in cost of goods sold. The remainder
of the restructuring expense was recorded as a separate component of the
1999 operating loss.
The following is an analysis of the third quarter 1999 restructuring
charges and restructuring reserves from June 30, 1999 to September 30,
1999.
<TABLE>
<CAPTION>
Employee Capitalized
Termination Software Fixed
Benefits Inventory Costs Asset Other Total
<S> <C> <C> <C> <C> <C> <C>
Balance at
June 30,
1999 $8,230 $9,656 $2,500 $464 $1,771 $22,621
Third quarter
charge
(benefit) (378) 234 -- 249 953 1,058
Utilized 2,777 3,789 -- 150 707 2,423
------ ------ ----------- ---- ------ -------
Balance at
Sept. 30,
1999 $5,075 $6,101 $2,500 $563 $2,017 $16,256
====== ====== =========== ==== ====== =======
</TABLE>
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The reserve for capitalized software costs was reclassified as of June 30,
1999 because the actual carrying value of the software costs was not
charged to the reserve for impaired software costs at June 30, 1999 but was
netted in the presentation of the June 30, 1999 consolidated balance sheet.
Remaining cash payments related to the restructuring charges listed above
amount to approximately $7.1 million.
The Company has made payments related to restructuring costs in 1999
amounting to $5.4 million, $900 thousand of which applied to the reserve
for termination benefits at January 1, 1999. The reserve for employee
termination benefits and other restructuring costs is classified with
accrued expenses and income taxes.
3. In August 1999, the Company acquired a 60% interest in QI Tech
(subsequently named Brown & Sharpe/Qianshao) for cash amounting to $3.8
million, and in June 1999, the Company purchased substantially all of the
assets and business of Display Inspection Systems, Inc. and Digital Data
Inspections Systems, Ltd. for $5.4 million. The allocation of the purchase
price for these acquisitions reported in the September 30, 1999
consolidated balance sheet is preliminary. The Company is determining the
fair value of the acquired inventories and selected other assets.
Management expects to determine the values of inventories and other assets
at a later date.
The unaudited pro forma consolidated results of operations, assuming the
above acquisitions had been made at January 1, 1998 is as follows:
September 30,
-------------------
1999 1998
--------- --------
Sales $239,510 $244,103
Net (loss) income $(27,632) $ 3,269
Net (loss) income per common share $ (2.06) $ 0.24
4. The composition of inventory is as follows:
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
Parts, raw materials, and supplies $33,008 $38,511
Work in process 19,095 20,515
Finished goods 31,705 29,365
------- -------
$83,808 $88,391
======= =======
5. 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 benefit for the first nine months of 1999 is
$0.6 million, while the same period of the previous year contained a tax
provision amounting to $1.6 million.
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6. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
-------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income $(2,511) $ 1,112 $(26,112) $ 5,286
Denominator:
Denominator for basic
earnings per share:
Weighted--average
shares 13,465 13,427 13,445 13,409
Effect of dilutive
securities:
Employee stock
options -- 157 -- 150
------- ------- -------- -------
Denominator for diluted
earnings per share:
Weighted average
shares and
assumed
conversions 13,465 13,584 13,445 13,559
======= ======= ======== =======
Basic (Loss) Earnings
Per Share $ (.19) $ .08 $ (1.94) $ .39
======= ======= ======== =======
Diluted (Loss) Earnings
Per Share $ (.19) $ .08 $ (1.94) $ .39
======= ======= ======== =======
</TABLE>
7. Components of comprehensive (loss) income are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
-------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net (loss) income $(2,511) $1,112 $(26,112) $ 5,286
Other comprehensive
(loss) income, net of tax:
Foreign currency
translation adjustments 3,711 8,509 (12,456) 5,392
------- ------ -------- -------
Comprehensive (loss) income $ 1,200 $9,621 $(38,568) $10,678
======= ====== ======== =======
</TABLE>
Accumulated other comprehensive (loss) income, net of related tax is
composed of foreign currency translation adjustments amounting to a loss of
$6.9 million and income of $5.5 million at September 30, 1999 and December
31, 1998, respectively.
8. The Company has been in default since June 30, 1999 with respect to a
financial covenant and, since September 30, 1999, with respect to a second
financial covenant in its $50 million long-term note agreement and its $30
million revolving credit agreement. The Company has received waivers
curing the financial covenant defaults incurred under its loan agreements
through the end of 1999. In addition, the lending agreements were amended
to add covenants to require the Company to grant the lenders a security
interest in its U.S. assets by November 19, 1999 and complete a
subordinated debt financing acceptable to the lenders by January 31, 2000.
Because there is no certainty that the Company can meet the terms of the
amended loan agreements or
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comply with the existing financial covenants, as to be reset, during the
following twelve month period, the $50 million of long-term debt
obligations have been classified as a current liability.
9. Contingent Liabilities. The Company is a party to two separate
environmental claims and certain product liability claims by various
plaintiffs. Management believes that damages, if any, will not be material
to the financial statements.
10. Financial Information by Business Segment
Segment Information. The Company operates exclusively in the Metrology
Business and conducts its business through its Measuring Systems Group
("MS"), Precision Measuring Instruments Division ("PMI"), Custom Metrology
Division ("CM"), and Electronics Division ("ED").
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, 1999
---------------------------------------------------
MS PMI CM ED TOTALS
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $ 53,333 $15,698 $ 2,702 $ 979 $ 72,712
Intersegment revenues 4 55 32 -- 91
Restructuring provision 5 659 394 -- 1,058
Segment profit (loss) 2,314 (970) (1,138) (1,034) (828)
Three Months Ended Sept. 30, 1999
---------------------------------------------------
MS PMI CM ED TOTALS
--------- -------- --------- -------- ---------
Revenues from
external customers $ 53,856 $18,966 $ 2,605 $ -- $ 75,427
Intersegment revenues 134 121 430 -- 685
Segment profit (loss) 2,780 794 (1,081) -- 2,493
Nine Months Ended Sept. 30, 1999
---------------------------------------------------
MS PMI CM ED TOTALS
--------- -------- --------- -------- ---------
Revenues from
external customers $170,125 $58,018 $ 7,656 $ 979 $236,778
Intersegment revenues 9 274 143 -- 426
Restructuring provision 9,441 6,898 7,449 -- 23,788
Segment (loss) (1,110) (5,987) (10,166) (1,034) (18,297)
Nine Months Ended Sept. 30, 1999
---------------------------------------------------
MS PMI CM ED TOTALS
--------- -------- --------- -------- ---------
Revenues from
external customers $172,295 $65,143 $ 7,343 $ -- $244,781
Intersegment revenues 396 517 1,238 -- 2,151
Segment profit (loss) 7,468 4,048 (2,879) -- 8,637
</TABLE>
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A reconciliation of combined operating profit for the MS, PMI, CM, and ED
segments to consolidated profit or loss before income taxes is as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Total revenues for reportable segments $ 72,803 $ 76,112
Elimination of intersegment revenues (91) (685)
-------- --------
Total Consolidated Revenues $ 72,712 $ 75,427
======== ========
Total (loss) profit for reportable segments $ (828) $ 2,493
Unallocated amounts:
Interest income 45 304
Other expense (2,714) (1,372)
-------- --------
(Loss) profit before income taxes $ (3,497) $ 1,425
======== ========
Nine Months Ended Sept. 30,
---------------------------
1999 1998
-------- --------
Total revenues for reportable segments $237,204 $246,932
Elimination of intersegment revenues (426) (2,151)
-------- --------
Total Consolidated Revenues $236,778 $244,781
======== ========
Total (loss) profit for reportable segments $(18,297) $ 8,637
Corporate restructuring charges (2,484) --
Unallocated amounts:
Interest income 168 899
Other expense (6,131) (2,677)
-------- --------
(Loss) profit before income taxes $(26,744) $ 6,859
======== ========
</TABLE>
11. In 1998, the Company changed its method of accounting for its larger, more
fully configured machines from the percentage of completion method to the
completed contract method. As a result of the use of the new accounting
method described above, sales for the three months ended September 30, 1998
increased $0.5 million and net income decreased $0.2 million ($.01 per
share) for the same period.
Also, certain other amounts reported in 1998 have been reclassified to
conform with the 1999 presentation.
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
RESULTS OF OPERATIONS
(Quarter Ended September 30, 1999 compared to Quarter Ended September 30, 1998)
SALES.
Sales for the third quarter of 1999 were $72.7 million compared with third
quarter sales in 1998 of $75.4 million, which is 3.6% below the 1998 level.
Third quarter sales for 1999 would have been $1 million higher than reported in
1999, if foreign denominated sales had been translated at 1998 foreign exchange
rates. The reduced U.S. Dollar value of 1999 foreign sales, which results from
translating the 1999 foreign denominated sales using lower exchange rates, is
due to the continued strengthening of the U.S. Dollar. When 1999 third quarter
sales are translated at the third quarter of 1998 exchange rates, 1999 sales
amount to $73.7 million, a $1.7 million decrease from 1998. The $1.7 million
decrease was caused by a $3.0 million decrease in sales of the Precision
Measuring Instruments ("PMI") division, offset by a sales increase of $1.0
million for the Electronics Division acquired in June 1999 and $0.3 million from
the MS and CM divisions.
MS sales increase of $0.2 million was primarily due to a $4.4 million increase
in aftermarket sales offset by a $4.2 million decrease in machine sales.
Approximately 62% of the decrease in machine sales came from more fully
configured coordinated measuring machines ("CMM"), with the remaining 38%
decrease coming from the smaller CMMs.
Sales for PMI were down $3.0 million due, primarily, to decreased sales volume
in the United States caused by stock reduction and consolidation of U.S. catalog
distributors, a slowdown in the United Kingdom sales due to restructuring plant
closings, and a slowdown in the Asian and South American markets.
RESTRUCTURING.
In the 1999 third quarter, the Company recorded an additional $1.1 million
restructuring charge related to previously announced restructurings implemented
in the first and second quarters. These additional charges consisted of a $0.2
million writedown of impaired assets; $0.2 million for further inventory
adjustments, which was classified in cost of sales; $0.4 million for a customer
dispute settlement; and $0.5 million for other exit costs. These additional
charges were offset by a $0.4 million benefit arising from the adjustment of a
charge recorded in the second quarter for employee termination benefits. The
$0.4 adjustment occurred because certain employees located in Italy elected to
leave the Company before the Company was required under local law to compensate
these employees due to the reorganization plan announced in July 1999. For
further information regarding the 1999 restructuring, see the comments provided
below.
EARNINGS.
The Company's net loss for the third quarter of 1999 was $2.5 million. The
third quarter net loss included $1.0 million of restructuring expenses, net of
taxes, as discussed above. Excluding the effect of the restructuring expenses,
the third quarter of 1999 would have realized a net loss $1.5, which compares
with net income $1.1 million for the same period in 1998.
The Company had an operating loss of $1.6 million in the third quarter of 1999,
which included, as discussed above, $1.1 million of restructuring expenses.
Excluding the effect of the restructuring charge, third quarter 1999 operating
loss would have been $0.5 million, which is $3.3 million below the results for
the third quarter of 1998. The gross margin for the third quarter of 1999 was
$21.8 million, which included $0.2 million of the $1.1 million restructuring
expenses. When the $0.2 million inventory adjustment is excluded from cost of
goods sold, the 1999 gross margin is $22.0 million, which is 30.3% of 1999
sales.
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This compares with a 1998 third quarter gross margin of $24.8 million, which was
32.9% of 1998 sales. The decrease of $2.8 in adjusted gross margin is comprised
of an increase in CM and Electronics gross margin of $0.5 million and $0.8
million, respectively, while MS and PMI's margins of $2.7 million and $1.4
million, respectively, are lower than the divisions' 1998 margins. The MS gross
profit is down due to lower gross margins for CMMs of all sizes offset, in part,
by improved margins for aftermarket services. Lower absorption contributed to
the lower margins for the CMMs. PMI's 1999 gross margins are below 1998 margins
because of lower absorption resulting from lower sales volume. CM gross profit
was up due to actions taken in the first quarter restructuring.
Selling, general and administrative expenses (SG&A) in 1999 were up $1.1 million
compared with 1998. $1.0 million of this increase is due to the recording of
expenses of the new companies acquired in the second and third quarters of 1999.
Results in the third quarter of 1999 included a $1.0 million tax benefit as
compared to a $0.3 million tax provision in the third quarter of 1998. The $1
million tax benefit was computed using an estimate annual effective tax rate of
40% which anticipates ordinary income for the full year, excluding the
restructuring charge. The higher tax rate in 1999 results from higher taxable
income in certain jurisdictions that could not be offset by tax benefits in
other jurisdictions. The restructuring charge provided a tax benefit of only
$11.0 thousand because there is no assurance that the future tax benefits in
Italy will be realized.
(Nine Months Ended September 30, 1999 compared to Nine Months Ended September
30, 1998)
SALES.
Sales for the first nine months of 1999 were $236.8 million compared with first
nine months sales in 1998 of $244.8 million, which is 3.3% below the 1998 level.
The impact from using prior year foreign exchange rates on 1999 sales was
negligible. Due to the minor effect the 1998 foreign exchange rates had on 1999
sales, the following discussion of sales fluctuations comparing 1999 to 1998
will be based upon 1999 exchange rates for 1999 sales. The $8.0 million sales
decrease in 1999 sales was caused by a $7.1 million and $2.2 million decrease,
respectively, in the PMI and MS divisions, offset by a $1 million increase for
the recently acquired electronics business and a $0.3 million increase in CM
sales.
The $2.2 million decrease in MS sales was primarily due to an approximate $10.8
million decrease in the sales of certain of the smaller coordinated measuring
machines ("CMM") and $4.3 million decrease in the sales of more fully configured
CMMs, offset by an increase of approximately $12.9 million in aftermarket
revenue.
Sales for PMI were down $7.1 million due, primarily, to decreased sales volume
in the United States caused by stock reduction and consolidation of U.S. catalog
distributors, a slowdown in the United Kingdom sales due to restructuring plant
closings, and a slowdown in the Asian and South American markets.
RESTRUCTURING.
In 1999, the Company embarked on a review of the Company's overall cost
structure, the purpose of which is to reduce costs and improve profitability
through factory focus missions and product line rationalization. The Company
announced a restructuring of its Custom Metrology ("CM") and Precision Measuring
Instruments ("PMI") divisions in the United Kingdom and its Measuring Systems
Division ("MS") in the first and second quarters of 1999, respectively. The
cost structure review is continuing, and further cost savings programs are
expected in 1999 as a result of this review.
As a result of the restructurings described above, the Company recorded, in the
first nine months of 1999, restructuring related charges, net of taxes,
amounting to $25.8 million ($1.92 per share). The charges provide for costs
associated with involuntary employee termination benefits for most of the
affected 342 employees, write-down of excess inventory to net realizable value,
write-down of impaired fixed assets and capitalized software costs, and other
exit costs, such as legal expense, lease cancellations, travel, etc. The
inventory adjustment of $8.2 million has been classified in cost of goods sold
in the nine months ended September 30, 1999. The remainder of the restructuring
expense was
Page 11
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recorded as a separate component of the 1999 operating loss.
Remaining cash payments related to the restructuring charges listed above amount
to approximately $7.1 million.
Much of the impaired software costs pertained to a management information system
installed for CM, which will no longer be supported when CM concentrates on its
new factory charter focusing on the turbine blade business. The existing
software was considered too robust for the remaining CM business and will be
replaced with a less costly reporting system. As a result, the existing
software was written off because it had no alternative use to the Company.
EARNINGS.
The Company's net loss for the first nine months of 1999 was $26.1 million. The
first nine months net loss included, as discussed above, $25.8 million of
restructuring expenses, net of taxes. Excluding the effect of the restructuring
expenses, the first nine months of 1999 would have realized $0.3 million of net
loss, which compares with $5.3 million net income for the same period in 1998.
The Company had an operating loss of $21.9 million in the first nine months of
1999, which included, as discussed above, $26.3 million of restructuring
expenses. Excluding the effect of the restructuring charge, first nine months
1999 operating profit would have been $4.4 million, which is $6.3 million below
the first nine months of 1998. The gross margin for the first nine months of
1999 was $67.7 million, which included $8.2 million of the $26.3 million
restructuring expenses. When the $8.2 million inventory adjustment is excluded
from cost of goods sold, the 1999 gross margin is $75.9 million, which is 32.1%
of 1999 sales. This compares with a 1998 first nine months gross margin of
$80.5 million, which was 32.9% of 1998 sales. The $4.6 million decrease in
gross margin is due to lower margins of $3.6 million, $1.7 million, and $0.1
million, respectively, for MS, PMI, and CM, offset by higher margins of $0.8
million for the Electronic Division. MS gross profit is down due to lower gross
margins for CMMs offset, in part, by improved margins for aftermarket services.
PMI is down due to sales volume while CM gross profit is down due to
underabsorption occurring earlier in the year before the restructuring plan was
implemented.
Selling, general and administrative expenses (SG&A) were up $3.0 million. $1.0
million of this increase is due to the recording of expenses of the new
companies acquired during the year. The remainder of the $2.0 million is due,
primarily, to costs incurred in 1999 related to the installation of a new
management information system to support MS sales activity.
Results in the first nine months of 1999 included a $0.6 million tax benefit as
compared to $1.6 million tax provision in the first nine months of 1998. The
$0.6 million tax benefit combines a $0.2 million benefit for the pretax loss
excluding restructuring charges and $0.4 million benefit relating to the
restructuring charge. The tax benefit excluding restructuring was based upon an
estimated effective tax rate of 40%, which anticipates ordinary income for the
full year, excluding the restructuring charge. The reasons for the higher
effective tax rate in 1999 are discussed above in the section describing the
results for the quarter ended September 30, 1999. The restructuring charge
provided a tax benefit of only $0.4 million because there is no assurance that
the future tax benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company is obligated under a $50 million private placement of senior notes
with principal payments due from November 2001 to November 2007, as well as
other long-term debt amounting to $21.1 million. $5.0 million of the $21.1
million matures in January 2000 and is expected to be refinanced at that time.
The Company also has a $30 million three year syndicated multi-currency
revolving credit facility with four banks, which expires in November 2000. 65%
of the shares of certain of the Company's foreign subsidiaries are pledged as
security under the private placement and the $30 million line of credit. In
addition to the $30 million revolving credit facility, the Company has $32.9
million in lines of credit with various banks located outside of the United
States. As of November 5, 1999, the Company has borrowed $27.4 million and $19.2
million under the revolving credit facility and foreign lines of credit,
respectively. The Company had $28.2 million cash on hand as of November 5, 1999.
During the second and third quarters of 1999, the Company breached certain
financial covenants relating to the debt to EBITA ratio and the interest
coverage ratio. The Company's lenders have granted waivers curing the
Page 12
<PAGE>
financial covenant defaults incurred under its loan agreements through the end
of 1999. In addition, borrowing rates under the Company's lending agreements
were increased, and the lending agreements were amended to add covenants to
require the Company to grant the lenders a security interest in its US assets by
November 19, 1999 and to complete a subordinated debt financing acceptable to
the lenders by January 31, 2000. The Company expects that the terms of the
subordinated debt financing will include warrants to purchase shares of the
Class A common stock of the Company in an amount to be negotiated.
The banks have continued to advance funds under the revolving credit to the
Company, and the Company is continuing to meet its operating cash needs.
However, the Company is, as a result of its recent amendments to its loan
agreements, prohibited to borrow under its foreign credit lines. There can be no
assurance that the lenders will continue to make additional funds (up to the $30
million maximum) available to the Company under the revolving credit (at
November 5, 1999 $2.6 million was available for additional borrowing under the
revolving credit) or that the Company will be able to complete a subordinated
debt financing in a principal amount and upon terms acceptable to its present
lenders or to reset its financial covenants on terms satisfactory to the
prospective subordinated debenture lenders and to its private placement lenders
under its Note Agreement and its revolving credit lenders under its Credit
Agreement, including the application of the proceeds of the new subordinated
debt financing to the partial payment of its existing debt under the Note
Agreement and under the Credit Agreement (subject to being reborrowed under the
revolving credit on the terms specified in the Credit Agreement as to be
amended). Until the financial covenants have been reset, the Company has
classified the $50 million obligation as a current liability. During this period
of discussions with its lenders, the Company is instituting additional cash
management procedures. If the Company's negotiations with the prospective
lenders of the contemplated subordinated debt financing and its present set of
lenders under the Note Agreement and lenders under the Credit Agreement are not
successful with respect to the timely issuance of the new subordinated debt
financing and in resetting the financial covenants under the various loan
documents, the Company plans to seek other alternative financing. However, it is
not possible to predict whether any such alternative arrangements could be
negotiated on satisfactory terms.
CASH FLOW.
Net cash provided by operations in the first nine months of 1999 and 1998 was
$6.2 million and $9.3 million, respectively. For the nine months ended
September 30, 1999, the net loss of $26.1 million was decreased by depreciation
and other non-cash items of $26.7 million, including restructuring charges of
$15.8 million and further decreased by a reduction in working capital of $5.6
million. For the nine months ended September 30, 1998, net income of $5.3
million, increased by depreciation and other non-cash items of $8.6 million and
reduced by an increase in working capital of $4.6 million.
Net cash used in investment transactions in 1999 and 1998 was $20.5 million and
$11.8 million, respectively. Capital expenditures in 1999 and 1998 amounted to
$7.3 million and $6.8 million, respectively. In 1999, the Company invested in
acquisitions amounting to $9.2 million. In 1999, it also provided an additional
$1.5 million to its equity investee; invested $0.9 million in marketable
securities to fund a defined benefit plan; and invested $1.7 million in
internally developed software costs. During 1998, $5.4 million was spent to
upgrade its management information systems.
Cash provided by financing transactions was $25.7 million during the first nine
months of 1999 compared to cash used in financing transactions of $1.7 in the
same period in 1998. Financing transactions during 1999 consisted of an
increase of $28.2 million in short-term borrowings, offset by principal payments
of long-term debt of $2.5 million. Financing transactions during the same
period in 1998 consisted of $2.4 million of long-term debt offset by $0.7
million due to the exercise of stock options.
WORKING CAPITAL.
Working capital decreased from $110.6 million at December 31, 1998 to $21.0
million at September 30, 1999 principally due to a reclassification of $50
million of senior long-term debt to currently payable as discussed above in the
section on liquidity and capital resources and the incurrence of $28.3 million
of short-term borrowings. These changes in short and long-term borrowings, along
with increases in accounts payable and accrued expenses, partially offset by
reductions in accounts receivable and inventories, were the major reasons for
the $89.6 million reduction in working capital.
Page 13
<PAGE>
PRODUCT DESIGN AND MANUFACTURING ENGINEERING.
The Company invested $10.6 million, or 4.5% of sales in 1999, and $13.3 million,
or 5.4% of sales in 1998 for product design and manufacturing engineering.
RISK FACTORS
INDEBTEDNESS.
As set forth in "Management's Discussion & Analysis Liquidity and Capital
Resources", during the second and third quarter of 1999, the Company breached
certain financial covenants. Effective November 9, 1999, the Company received
waivers curing the defaults through the end of 1999. There can be no assurance
that the Company will be able to compute a subordinated debt financing
acceptable to the lenders by January 31, 2000, or successfully provide a
security interest in its U.S. assets by November 19, 1999, as required in the
amended note and credit agreement, and negotiate amendments on satisfactory
terms to the Note Agreement with its private placement lenders and to the Credit
Agreement with its revolving credit lenders. The Company expects that the terms
of the subordinated debt financing will include warrants to purchase shares of
the Class A common stock of the Company in an amount to be negotiated. If the
Company is unable to acquire the required subordinated debt financing and its
negotiations with both sets of its lenders are not successful in resolving these
issues, the Company plans to seek other alternative financing. However, it is
not possible to predict whether any such alternative arrangements could be
negotiated on satisfactory terms. For additional details, see "Management's
Discussion & Analysis Liquidity and Capital Resources" elsewhere in this Report
(where is hereby incorporated by reference).
COMPETITION.
The Company's MS Group currently has four principal direct domestic and foreign
competitors, some of which are owned by entities that have greater financial and
other resources than the Company. The MS Group also faces indirect competition
from other types of metrology firms such as manufacturers of fixed gauging
systems. The primary industries to which the MS Group sells its products are
characterized by a relatively small number of large participants with
significant purchasing power. In addition, the MS Group generally sells its
products through a competitive bid process in which at least one and frequently
several of the Company's competitors submit competing bids. As a result, the
Company experiences significant pricing competition in connection with sales by
its MS Group which can have an adverse impact on the Company's sales and
margins. During periods when the metrology industry suffers from over capacity,
downward pricing pressure experienced by the MS Group is likely to be more
intense and the Company's margins may be more severely impacted. In addition,
certain of the Company's competitors have access to greater financial resources
and may be able to withstand such pricing pressure more effectively than the
Company. Accordingly, there can be no assurance that the MS Group will be able
to continue to compete effectively against existing competitors or new
competitors, especially during periods of over capacity.
The market for the PMI Division's products is fragmented and the PMI Division
competes with a large number of competitors, including the market leader in this
area, primarily on the basis of the strength of its third-party distribution
network, price and product innovation. New competitors from emerging
industrialized countries with lower production costs than the Company's
represent a significant competitive challenge to the Company. As a result, the
PMI Division's continued success and profitability will be dependent on its
ability to continue to develop cost-effective sourcing and innovative products.
CYCLICALITY OF END USER MARKETS.
The primary end user markets for the Company's products, which include the
aerospace, heavy transport and automotive (including automotive suppliers)
industries, experience cyclicality in connection with recessionary periods.
As a consequence, the price of and margins for the Company's products have been
and are likely to continue to be adversely impacted by decreases in capital
spending by such end user markets during recessionary periods. In addition,
because the PMI Division sells primarily through distributors, the PMI Division
is likely to experience significant declines in sales volumes during
recessionary periods because catalog houses and distributors typically reduce
purchases of the Company's products at the onset of
Page 14
<PAGE>
such recessionary periods even more than the decline in their end user markets'
demands would dictate, in order to reduce their inventories. There can be no
assurance that the Company will be able to operate profitably during any
recessionary downturn.
FOREIGN OPERATIONS.
As of September 30, 1999, approximately 67% (based on book values) of the
Company's assets, 51% of the Company's sales (based on customer location) and
65% of its employees were located outside the United States. Foreign operations
are subject to special risks that can materially affect the sales, profits, cash
flows and financial position of the Company, including taxes on distributions or
deemed distributions to the Company or any U.S. subsidiary, currency exchange
rate fluctuations, inflation, maintenance of minimum capital requirements,
import and export controls, exchange controls and social (labor) programs.
In addition, the wide-spread geographic locations of the Company's facilities
and operations make it more difficult for the Company to coordinate its
financial and operating reporting and oversee its operations and employees. In
response to these difficulties, the Company has taken various personnel and
procedural actions to improve its reporting and operating procedures. While the
Company believes that these actions have resulted in satisfactory financial and
operational reporting and oversight for its present business, additional system
revisions may be needed if the Company should experience a further increase in
the number of foreign facilities.
DEPENDENCE ON KEY SUPPLIER.
The Company currently purchases the vast majority of its externally sourced low
to medium accuracy electronic touch trigger sensor probes and heads from a
publicly held United Kingdom company (the "Supplier") which is the dominant
supplier of such sensor probes to CMM manufacturers. No alternative supplier
for this class of electronic sensor probes, which are a key component of
substantially all of the Company's lower accuracy CMMs, is currently available
and developing an alternative source for the probes and heads could take more
than a year. Although adequate supplies of such probes and heads for at least
several months is potentially available from current inventories of the Company
and its customers, any reductions or interruptions in supply or material
increases in the price of electronic sensor probes purchased from the Supplier
could cause the Company to suffer disruptions in the operation of its business
or incur higher than expected costs, which could have a material adverse effect
on the Company.
TECHNOLOGY.
As the size of some components measured by metrology products decreases and the
required speed and precision of such measurements increases, the Company's
products may become obsolete unless the Company develops more sophisticated
software and metrology systems. Although the Company's strategy is to focus
research and development in the area of software development and non-contact
technologies, there can be no assurance that the Company will be successful in
competing against new technologies or competitors, some of whom may not now
participate in the metrology industry.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL.
The success of the Company is dependent to a significant extent upon the
continuing services of a limited number of key executives of the senior
management team. Loss of the services of one or more of these senior executives
could have a material adverse effect on the Company.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has no derivative financial instruments or derivative commodity
instruments but does have outstanding long-term debt. Substantially all of its
long-term debt is fixed rate obligations. An increase in interest rates would
not significantly increase interest expense or cash flows due to the fixed
nature of the debt obligations, and a 10% change in interest rates would not
result in a material change in the fair value of its debt obligations.
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<PAGE>
A portion of the Company's consolidated long-term debt consist of obligations of
certain of its foreign subsidiaries, which are denominated in the currencies of
the countries in which these subsidiaries are located. The Company does not
hedge these foreign denominated debt obligations, since all of the foreign debt
is payable in the functional currencies of these foreign subsidiaries. Since
there is no foreign currency exchange risk related to the debt obligations of
these foreign subsidiaries, net income and net cash flows are not effected by
changes in the foreign exchange rates of these obligations, and a 10% increase
in the foreign exchange rates of these debt obligations would not have a
material effect on the Company's financial position.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment and
software and devices with embedded technology that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that Year 2000 disruptions could affect it in three areas:
(i) disruptions to the Company's internal systems; (ii) disruptions to the
Company's suppliers and customers; and (iii) problems within the Company's
products sold to customers.
INTERNAL SYSTEMS.
The Company has undertaken various initiatives intended to ensure that its
internal computer equipment and software will function properly with respect to
dates in the Year 2000 and thereafter. For this purpose, the term "internal
computer equipment and software" includes systems that are commonly thought of
as IT systems, including accounting, data processing, telephone/PBX systems,
servers and mainframes, and other miscellaneous systems, as well as systems that
are not commonly thought of as IT systems, such as shop floor or other equipment
at facilities, fixtures, alarm systems, fax machines, or other miscellaneous
systems. Both IT and non-IT systems may contain embedded technology, which
complicates the Company's Year 2000 identification, assessment, remediation, and
testing efforts. Based upon its identification and assessment efforts to date,
the Company has identified the internal computer equipment and software which
will require replacement or modification. The Company has completed its Year
2000 identification, risk assessment, remediation and testing efforts with
respect to internal systems. As of June 30, 1999, the Company had completed the
initiatives that it believes will be necessary to address potential Year 2000
issues relating to its internal computer equipment and software, and a list of
all systems requiring remediation was completed. As of September 30, 1999, the
Company believes that it had completed all necessary repair and replacement of
these items. The Company currently estimates that the cost for remediation of
its internal computer equipment and software, including the inspection costs at
its facilities, will not exceed $2 million. In the event that there exists
Company shop floor or the facilities Year 2000 issues which remain unresolved
and the Company is required to shut down certain facilities, the loss accrued as
a result of a facilities shutdown could have a material adverse effect on the
business and results of operations of the Company.
SUPPLIERS AND CUSTOMERS.
The Company has created and distributed two waves of Year 2000 supplier
readiness surveys for all of its facilities, and has created a Year 2000
Readiness survey to be distributed to all of its known customers. The surveys
have four purposes: (i) to assure the Company that its customers and suppliers
are fully aware of the Year 2000 issues and their ramifications; (ii) to
determine the extent to which interfaces with suppliers are vulnerable to Year
2000 issues and whether the products and services purchased from such suppliers
are Year 2000 compliant; (iii) to assure the Company that the flow of new
equipment orders, as well as service and warranty orders will be substantially
uninterrupted by the Year 2000 problem; and (iv) to assure the Company that the
Year 2000 problem will not create an inability on the customer's part to pay
invoices in a timely manner. Although the Company recently completed a major
supplier consolidation effort, there still exist a limited number of sole
sources of supply for certain components used by the Company. The Company is
focusing on critical, single source suppliers for the purpose of scheduling
meetings and supplier audits for the purpose of Year 2000 compliance
verification. In the event that these single source, critical suppliers are not
compliant in advance of the
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<PAGE>
turn of the century, and in the event that the areas of non-compliance will
affect the Company, the supplier re-sourcing process will commence. The Company
currently estimates that the cost and time to benchmark and re-source a
supplier, if a single source supplier, could materially affect the business.
Should a customer be in a non-compliant situation with regard to only their
internal systems, aside from the cost of inconvenience, the Company believes
there would be minimal additional costs to transacting normal business with
them. In the event that the non-compliance Year 2000 issues were customer shop
floor and/or facilities related, the ramifications could be materially greater.
PRODUCTS.
Software in some of the Company's products is date sensitive and therefore
subject to Year 2000 issues. There are no date sensitivities known in any other
facet of the Company's products. The Company believes that the software in its
products currently being shipped (since mid-1998) is Year 2000 compliant (with
the exception of a Y2K remediation patch which has been developed for one
narrowly used product). Older products, however, that may be subject to date
sensitivities in the software are not or may not be Year 2000 compliant, and in
all cases the Year 2000 compliance of such products must also be evaluated by
the customer in light of the Year 2000 compliance status of the customer's
specific computer and operating system that are being used by the customer to
obtain the benefits of the Company's products in the customer's
manufacturing/assembly operations. Software is divided into three (3) main
categories and remediations means. The first category of current products
includes products shipped by the Company since mid-1998. All of these products
are fully supported, have been tested for Year 2000 compliance, and are believed
by the Company to be Year 2000 compliant. The second category of non-current but
supported products includes products shipped by the Company prior to mid-1998.
These products may not have been tested for Year 2000 compliance and may be
subject to Year 2000 related failures to some degree. These products are
supported to the degree that there are updates available to the customer which
have been tested and are believed by the Company to be Year 2000 compliant. The
third category of non-supported products includes products whose production has
been discontinued. These products have not been tested for Year 2000 compliance
by the Company and are not supported with Year 2000 compliant updates. The
Company supports customers using these products to the extent that software
upgrades are available which have been tested and are believed by the Company to
be Year 2000 compliant.
CONTINGENCY PLAN.
Should the Company's remediation efforts regarding its internal computer
equipment and software, the Company's products and software, shop floor
productivity equipment with embedded technologies, or any other areas of
potential Year 2000 failure prove not to be fully adequate, the Company's
contingency plan calls for the Company to operate manually or outsource mission
critical portions of their operations until proper remediation efforts gave way
to renewed automation. The cost associated with any such outsourcing efforts or
other necessary actions or any delays related thereto has not been determined.
THE COSTS.
The costs of the Company's Year 2000 identification, assessment, remediation and
testing efforts and the dates on which the Company believes it will complete
such efforts, or the assessments the Company has previously made, are based upon
management's best estimates. These estimates were derived using numerous
assumptions regarding future events, including the continued availability of
certain resources; customer, supplier, other best practice third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to properly identify,
assess, remediate and test all relevant computer codes and embedded technology,
and similar uncertainties. In addition, variability of definitions of
"compliance with Year 2000" and the myriad of different products and services,
and combinations thereof, sold by the Company may lead to claims by customers
whose impact on the Company is not currently estimable. No assurance can be
given that the aggregate cost of defending and resolving such claims, if any,
will not materially adversely affect the Company's results of operations.
Page 17
<PAGE>
EUROPEAN MONETARY UNION
Effective January 1, 1999, eleven of fifteen member countries of the European
Union ("EU") are scheduled to establish fixed conversion rates between their
existing sovereign currencies and a common currency, the "Euro". During a
transition period from January 1, 1999 to June 30, 2002, non-cash transactions
may be denominated in either Euros or the existing currencies of the EU
participants from January 1, 1999 to January 1, 2002. After January 1, 2002,
all non-cash transactions must be denominated in Euro. Euro currency will not
be issued until January 1, 2002, and on June 30, 2002, all national currencies
of the EU participating countries will become obsolete.
The Company has significant operations in several of the EU countries that will
convert, or that may convert, to the Euro. The introduction of the Euro on
January 1, 1999 may present substantial risks to the Company for its operations
located in the EU participating countries. These risks include competitive
implications of conversion resulting from harmonization of pricing policies and
practices in our European operations; possible increased costs associated with
the conversion; and the ability to modify existing information systems on a
timely basis, if at all, as well as the ability to absorb the costs associated
with the systems modifications, if required.
The Company has established various policies to be implemented during the
transition period. The Company has taken a position on pricing policy.
Essentially, Euro pricing will be provided if requested by customers; otherwise,
pricing will continue in legacy currencies. This pricing policy will apply to
both Euro and non-Euro countries. For accounting purposes, the Company will
treat the Euro as any other currency while maintaining its accounts records in
legacy currency. All affected locations have been contacted about their ability
to manage the required triangulation when converting from one legacy currency to
another. Although the present accounting systems do not handle triangulation,
the calculation is being done using commercial software. All of the Company's
banks are providing dual statements and can accept and make payments in both
legacy currency and Euro.
The Company's current business operating software is not Euro compliant.
Management is conducting an evaluation of alternative software that will enable
it to process Euro translations and believes that all matters will be resolved
prior to the mandatory implementation date.
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<PAGE>
Item 3. DEFAULT UPON SENIOR SECURITIES
- ------ ------------------------------
The Company has been in default since June 30, 1999 with respect to a financial
ratio covenant (and since September 30, 1999 with respect to a second financial
ratio covenant) in its Note Agreement dated November 10, 1997 (the "Note
Agreement") with insurance companies relating to $50 million principal amount of
7.29% Senior Notes Due 2007 and its Credit Agreement dated as of November 10,
1997 (the "Credit Agreement") with bank lenders relating to a revolving credit
of up to $30 million. The loan covenant violations relate to the debt to EBITA
ratio and the interest coverage ratio, as provided in the lending agreements.
The Company's lenders have granted waivers curing financial covenant defaults
incurred under its loan agreements through the end of 1999. In addition,
borrowing rates under the Company's lending agreements were increased and the
lending agreements were amended to add covenants to require the Company to grant
the lenders a security interest in its US assets by November 19, 1999 and to
complete a subordinated debt financing acceptable to the lenders by January 31,
2000. The Company expects that the terms of the subordinated debt financing will
include warrants to purchase shares of the Class A common stock of the Company
in an amount to be negotiated.
The banks have continued since June 30, 1999 to advance funds under the
revolving credit to the Company during the default period, and the Company is
continuing to meet its operating cash needs. However, there can be no assurance
that the lenders will continue to make additional funds (up to the $30 million
maximum) available to the Company under the revolving credit (at November 5,
1999 $2.6 million was available for additional borrowing under the revolving
credit) or that the Company will be able to complete a subordinated debt
financing in a principal amount and upon terms acceptable to its present lenders
or to reset its financial covenants on terms satisfactory to the prospective
subordinated debenture lenders and to its private placement lenders under its
Note Agreement and its revolving credit lenders under its Credit Agreement,
including the application of the proceeds of the new subordinated debt financing
to the partial payment of its existing debt under the Note Agreement and under
the Credit Agreement (subject to being reborrowed under the revolving credit on
the terms specified in the Credit Agreement as to be amended). Until the
financial covenants under the private placement lenders have been reset, the
Company has classified the $50 million obligation as a current liability.
If the Company's negotiations with the prospective lenders of the contemplated
subordinated debt financing and its present set of lenders under the Note
Agreement and lenders under the Credit Agreement are not successful with respect
to the timely issuance of the new subordinated debt financing and in resetting
the financial covenants under the various loan documents, the Company plans to
seek other alternative financing. However, it is not possible to predict
whether any such alternative arrangements could be negotiated on satisfactory
terms.
For additional details, see "Management's Discussion & Analysis--Liquidity and
Capital Resources" elsewhere in this Report.
Page 19
<PAGE>
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, 1999.
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/ Andrew C. Genor
-------------------
Andrew C. Genor
Chief Financial Officer
(Principal Financial Officer)
November 12, 1999
Page 20
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
27. Financial Data Schedule.
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 19,415
<SECURITIES> 0
<RECEIVABLES> 95,824
<ALLOWANCES> 3,836
<INVENTORY> 83,808
<CURRENT-ASSETS> 202,933
<PP&E> 145,900
<DEPRECIATION> 91,147
<TOTAL-ASSETS> 309,051
<CURRENT-LIABILITIES> 181,952
<BONDS> 0
0
0
<COMMON> 13,515
<OTHER-SE> 78,230
<TOTAL-LIABILITY-AND-EQUITY> 309,051
<SALES> 236,778
<TOTAL-REVENUES> 236,778
<CGS> 169,061
<TOTAL-COSTS> 89,575
<OTHER-EXPENSES> (61)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,947
<INCOME-PRETAX> (26,744)
<INCOME-TAX> (632)
<INCOME-CONTINUING> (26,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,112)
<EPS-BASIC> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
