<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 March 31, 2000
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; 13,284,020 shares of Class A
common stock, 503,865 shares of Class B common stock, par value $1 per share,
outstanding as of March 31, 2000.
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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 Mar.31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Sales $ 72,473 $ 82,414
Cost of sales - Note 3 49,321 61,243
Research and development expense 2,844 2,762
Selling, general and
administrative expense 19,109 21,550
Restructuring (benefit) charges - Note 3 (472) 10,762
----------- -----------
Operating profit (loss) 1,671 (13,903)
Interest expense 2,151 1,411
Other income, net 369 350
----------- -----------
Loss before income taxes (111) (14,964)
Income tax (benefit) provision (39) 83
----------- -----------
Net loss $ (72) $ (15,047)
=========== ===========
Net loss
per common share:
Basic and diluted $ (.01) $ (1.12)
=========== ===========
Weighted average shares
outstanding 13,526,771 13,397,725
=========== ===========
</TABLE>
* The accompanying notes are an integral part of the financial statements.
Page 2
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Mar. 31, 2000 December 31, 1999
-------------- ------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 36,685 $ 36,643
Accounts receivable, net of allowances for
doubtful accounts of $4,499 and $4,759 81,583 88,300
Inventories 62,623 68,310
Prepaid expenses and other current assets 6,425 5,553
-------- --------
Total current assets 187,316 198,806
Property, plant and equipment:
Land 6,329 6,510
Buildings and improvements 34,327 35,465
Machinery and equipment 91,889 94,011
-------- --------
132,545 135,986
Less-accumulated depreciation 86,519 88,667
-------- --------
46,026 47,319
Goodwill, net 13,697 11,145
Other assets 45,149 44,907
-------- --------
$292,188 $302,177
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable to banks $ 40,312 $ 41,110
Accounts payable 41,046 41,916
Accrued expenses and income taxes 49,651 52,504
Notes payable and current
installments of long-term debt 53,311 53,585
-------- --------
Total current liabilities 184,320 189,115
Long-term debt 14,842 15,445
Long-term liabilities 26,062 26,083
Commitments and contingencies - -
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 13,326,612 shares
in 2000 and 13,010,623 shares in 1999 13,327 13,011
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 503,865 shares in 2000
and 504,414 shares in 1999 504 504
Additional paid in capital 113,473 113,085
Retained earnings (deficit) (44,306) (44,234)
Other comprehensive (loss) income (15,579) (10,377)
Treasury stock: 42,592 shares in 2000 and
in 1999 at cost (455) (455)
-------- --------
Total shareowners' equity 66,964 71,534
-------- --------
$292,188 $302,177
======== ========
</TABLE>
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BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three-Months Ended Mar. 31,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Provided by (Used in) Operations:
Net (loss) income $ (72) $(15,047)
Adjustment for Noncash Items:
Restructuring (benefits) charges (472) 15,703
Depreciation and amortization 2,842 3,141
Unfunded pension 579 636
Termination indemnities 115 109
Other non-cash 428 -
Changes in Working Capital:
Decrease (Increase) in accounts receivable 4,305 (5,453)
Decrease (Increase) in inventories 82 (6,081)
(Increase) in prepaid expenses and
other current assets (1,024) (301)
(Decrease) Increase in accounts payable
and accrued expenses (745) 3,368
------- --------
Net Cash Provided by (Used in) Operations 6,038 (3,925)
------- --------
Investment Transactions:
Capital expenditures (1,945) (2,890)
Sale of an investment - 76
Investment in other assets (943) (111)
------- --------
Cash Used in Investment Transactions (2,888) (2,925)
------- --------
Financing Transactions:
(Decrease) Increase in short-term debt (257) 2,616
Principal payments of long-term debt (393) (390)
------- --------
Cash (Used in) Provided by Financing Transactions (650) 2,226
------- --------
Effect of Exchange Rate Changes on Cash (2,458) (2,134)
------- --------
Cash and Cash Equivalents:
Increase (Decrease) during the period 42 (6,758)
Beginning balance 36,643 12,290
------- --------
Ending balance $36,685 $ 5,532
======= ========
Supplementary Cash Flow Information:
Interest paid $ 732 $ 285
======= ========
Taxes paid $ 233 $ 135
======= ========
</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 March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. 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, 1999.
2. In 1999, the Company incurred a net loss amounting to $42.9 million, which
included restructuring charges amounting to $36.8 million. In addition to
the operating loss, the Company also incurred a loss amounting to $15.9
million arising from the translation of the balance sheets of its foreign
subsidiaries, which are denominated in foreign currencies. This loss was
recorded as Other Comprehensive Loss and classified in shareowners' equity.
Although the Company's net loss for the first quarter of 2000 was only $72
thousand, it incurred an additional $5.2 million loss arising from foreign
exchange translation which reduced shareholders' equity at March 31, 2000
to $67 million.
The 1999 operating results caused the Company to violate certain of its
loan covenants with several banks who had provided the Company with a $30
million, three-year syndicated, multi-currency revolving credit facility,
which had a $27.4 million balance outstanding at March 31, 2000, and with
its private placement lenders who had provided $50 million of long-term
financing in 1997. The 1999 operating loss and the foreign exchange losses
caused the Company to violate the debt to EBITDA ratio and debt to net
worth ratio covenants, as well as certain other covenants. In November
1999, the Company's lenders granted waivers curing the financial covenant
defaults incurred under its loan agreements through the end of 1999. The
lending agreements were also amended at that time to add certain other
covenants, including a requirement that the Company complete a subordinated
debt financing acceptable to the lenders by January 31, 2000. The Company
was unable to complete a refinancing by January 31, 2000 and is in
violation of this loan covenant. As of April 30, 2000, the Company has not
yet obtained a waiver for this violation.
Over the past several months, management has been investigating various
refinancing alternatives, including a possible sale of equity securities.
The Company's Board of Directors ("Board") established a Special Committee
of three independent directors to oversee, evaluate, and work with
management and the Company's advisors to pursue and complete, subject to
approval by the full Board, a financing transaction to remedy the Company's
default situation with respect to the loan covenants.
At April 30, 2000, the Company had $32.7 million of cash on hand and has
been meeting its normal cash needs. In addition, management plans to
generate sufficient cash to meet its expected cash requirements in 2000 by
reducing accounts receivable and inventory levels, as well as by enforcing
strict cash management procedures. However, the refinancing of its capital
structure in 2000, the availability of adequate liquidity throughout the
year, the negotiation of
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acceptable loan covenants with its existing lenders, as well as any
possible future lenders, and complying with the terms of its financing
agreements are essential for the Company to continue as a going concern. If
the Company is unable to refinance its debt with equity or subordinated
debt and its negotiations with both sets of its principal 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.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability
and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
3. During the first quarter of 1999, the Company recorded a restructuring
charge of $15.7 million. An inventory adjustment of $4.9 million was
classified in the 1999 results in cost of goods sold. The remainder of the
restructuring expense was recorded as a separate component of the 1999
operating loss. In 2000, the Company recorded a $.5 million restructuring
benefit that resulted from a sublease of rental property that was vacated
as part of the restructuring that occurred in 1999. In addition, in the
first quarter of 2000, the Company terminated 76 employees as a result of
the restructuring of one of the PMI divisions.
The following is an analysis of the activity of the restructuring reserves
from December 31, 1999 to March 31, 2000:
<TABLE>
<CAPTION>
Employee Fixed Asset
Termination and
Benefits Inventory Intangible Other Total
-------- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1999 $ 6,760 $ 9,547 $2,282 $5,092 $23,681
Utilized (1,556) (2,391) (4) (908) (4,859)
Benefit - - - (472) (472)
Foreign exchange (309) (315) (70) (97) (791)
------- ------- ------ ------ -------
$ 4,895 $ 6,841 $2,208 $3,615 $17,559
======= ======= ====== ====== =======
</TABLE>
Cash payments amounting to $2.5 million relating to restructuring reserves
were disbursed in the first quarter of 2000, and further payments amounting
to approximately $7.7 million will be paid during the remainder of 2000.
An additional $.8 million will be paid in subsequent years.
4. The composition of inventory is as follows:
<TABLE>
<CAPTION>
Mar. 31, 2000 Dec. 31, 1999
------------- -------------
<S> <C> <C>
Parts, raw materials, and supplies $25,734 $29,591
Work in process 14,456 14,274
Finished goods 22,433 24,445
------- -------
$62,623 $68,310
======= =======
</TABLE>
Inventories belonging to the Electronics Division, which was acquired in
1999, were adjusted $2.5 million at March 31, 2000 in order to record the
acquired inventory at fair value at the date of acquisition. The $2.5
million adjustment was recorded as an increase in goodwill arising from the
acquisition.
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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 three months of 2000 is
$39 compared to a tax provision of $85 in the same period of the previous
year.
6. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Quarter Ended Mar.31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Numerator:
Net loss $ (72) $(15,047)
Denominator:
Denominator for basic earnings per share:
Weighted - average shares 13,527 13,398
Effect of dilutive securities:
Employee stock options - -
------- --------
Denominator for diluted earnings per share
Weighted - average shares and
assumed conversions 13,527 13,398
======= ========
Basic Loss Per Share $ (.01) $ (1.12)
======= ========
Diluted Loss Per Share $ (.01) $ (1.12)
======= ========
</TABLE>
7. Components of comprehensive income (loss) are as follows:
For the Quarter Ended Mar.31,
-----------------------------
2000 1999
---- ----
Net Loss $ (72) $(15,047)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (5,202) (9,718)
------- --------
Comprehensive loss $(5,274) $(24,765)
======= ========
Accumulated other comprehensive (loss) income, net of related tax, at March
31, 2000 and December 31, 1999 is composed of foreign currency translation
adjustments amounting to a loss of $15.6 million and $10.4 million,
respectively.
8. Contingencies
The Company is a defendant in a variety of legal claims that arise in the
normal course of business. Based upon the information presently available
to Management, the Company believes that any liability for these claims
would not have a material effect on the Company's results of operations or
financial condition.
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<PAGE>
9. Financial Information by Business Segment
Segment Information. The Company operates exclusively in the Metrology
Business and conducts its business through the Measuring Systems Group
("MS"), Precision Measuring Instruments Division ("PMI"), and Custom
Metrology Division ("CM"), Brown & Sharpe Information Systems ("BSIS") and
Electronics Division ("ED").
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
----------------------------------------------------------
MS PMI CM BSIS ED TOTALS
<S> <C> <C> <C> <C> <C> <C>
Revenues from
external customers $51,412 $19,476 $ 1,569 $ - $ 16 $ 72,473
Intersegment revenues 4 9 5 1,500 - 1,518
Restructuring benefit 472 - - - - 472
Segment profit (loss) 2,080 1,441 (776) (2,363) (1,407) (1,025)
Three Months Ended March 31, 1999
----------------------------------------------------------
MS PMI CM BSIS TOTALS
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $57,889 $21,811 $ 2,714 $ - $ 82,414
Intersegment revenues 3 118 8 - 129
Restructuring benefit - (6,239) (6,980) - (13,219)
Segment profit (loss) 2,197 (5,649) (8,422) (1,070) (12,944)
</TABLE>
A reconciliation of combined operating profit for the MS, PMI, CM, BSIS and
ED segments to consolidated profit or loss before income taxes is as
follows:
2000 1999
---- ----
Total revenues for reportable segment $73,991 $ 82,543
Elimination of intersegment revenues (1,518) (129)
------- --------
Total Consolidated Revenues $72,473 $ 82,414
======= ========
Total loss for reportable segments $(1,025) $(12,944)
Corporate restructuring charges - (2,484)
Unallocated amounts:
Interest income 257 78
Other income 657 386
------- --------
Loss Before Income Taxes $ (111) $(14,964)
======= ========
10. Certain other amounts reported in 1999 have been reclassified to conform
with the 2000 presentation.
Page 8
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
RESULTS OF OPERATIONS
(Quarter Ended March 31, 2000 compared to Quarter Ended March 31, 1999)
Sales
Sales for the first quarter of 2000 were $72.5 million compared with first
quarter sales in 1999 of $82.4 million, which is 12.0% below the 1999 level.
First quarter sales for 2000 would have been $4.6 million higher than reported
in 2000, if foreign denominated sales had been translated at 1999 foreign
exchange rates. The reduced U.S. Dollar value of 2000 foreign sales, which
results from translating the 2000 foreign denominated sales using lower exchange
rates, is due to the continued strength of the U.S. dollar. When 2000 first
quarter sales are translated at the first quarter of 1999 exchange rates, 2000
sales amount to $77.1 million, a $5.3 million decrease over 1999. The $5.3
million sales decrease was caused by a $3.3 million, $.9 million and a $1.1
million sales decrease in the Measuring Systems ("MS"), the Precision Measuring
Instruments ("PMI") and the Custom Metrology Division ("CM"), respectively.
The $3.3 million decrease in MS sales was primarily due to an approximate $4.4
million decrease in the sales of larger more-fully configured coordinated
measuring machines ("CMM") offset by an increase of $.8 million of smaller CMM's
and $.3 million of aftermarket revenue.
Sales for PMI were down $.9 million primarily due to restructuring in the United
Kingdom and France offset, in part, by increased sales in the United States.
Sales for CM were down $1.1 million because CM discontinued the sales of can
gauging and special machines when it reorganized its business in 1999.
Restructuring
The following is an analysis of the restructuring reserves from December 31,
1999 to March 31 2000:
<TABLE>
<CAPTION>
Employee Fixed Asset
Termination and
Benefits Inventory Intangible Other Total
-------- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1999 $ 6,760 $ 9,547 $ 2,282 $ 5,092 $ 23,681
Utilized (1,556) (2,391) (4) (908) (4,859)
2000 Benefit - - - (472) (472)
Foreign exchange (309) (315) (70) (97) (791)
-------- -------- --------- ------- --------
$ 4,895 $ 6,841 $ 2,208 $ 3,615 $ 17,559
======== ======== ========= ======= ========
</TABLE>
Cash payments amounting to $2.5 million, which included payments to 76 employees
whose services were terminated in the first quarter of 2000, relating to
restructuring reserves recognized in 1999 were disbursed in the first quarter of
2000 and further payments amounting to approximately $7.7 million will be paid
during the remainder of 2000. An additional $.8 million will be paid in
subsequent years.
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Earnings
The Company's net loss for the first quarter of 2000 was $72 thousand. The
first quarter net loss included $.5 million of restructuring income, net of
taxes, resulting from a sublease of rental property that was vacated due to the
1999 reorganization. Excluding the effect of the restructuring income, the
first quarter of 2000 operations incurred a $.6 million net loss. The first
quarter of 1999 net loss was $15.0, which included $15.5 million of
restructuring expenses, net of taxes. Excluding the effect of the restructuring
expense, the first quarter of 1999 realized $.5 million of net income.
Operating income in the first quarter of 2000 was $1.7 million. In the first
quarter of 1999, the Company had an operating loss of $13.9 million, which
included $15.7 million of restructuring expenses. Excluding the effect of the
restructuring charge, first quarter 1999 operating income would have been $1.8
million. The gross margin for the first quarter of 2000 was $23.2 million,
which is 32.0% of 2000 sales. The gross margin for the first quarter of 1999
was $21.2 million, which included a $4.9 million inventory adjustment from
restructuring. If the inventory adjustment was excluded from cost of goods
sold, the 1999 gross margin would amount to $26.1 million, which is 31.7% of
1999 sales. The $2.9 million decrease in gross margin is due to lower margins
amounting to $2.5 million and $.4 million for MS and CM, respectively.
The reduced gross margin of $2.5 million for MS was due to lower gross margins
in machine sales offset in part by higher margins in the aftermarket systems
arising from sales of spare parts and training. CM's gross margin was lower due
to reduced sales volume arising from restructuring done in 1999.
Selling, general, and administrative expenses ("SG&A") for the first quarter of
2000 were 26.3% of sales as compared to 26.2% for the comparable period in 1999.
SG&A expenses for the first quarter of 2000 are $2.4 million lower than the
first quarter of 1999. SG&A expenses for the first quarter of 2000 translated at
the first quarter of 1999 exchange rates were $1.2 million less than the first
quarter of 1999. First quarter 2000 SG&A expenses include approximately
$1 million of expenses incurred by the Electronics Division and Brown &
Sharpe/Qianshao which were acquired in 1999 in the second and third quarters,
respectively. Adjusting for the effect of foreign translation and the two
previously mentioned acquisitions, 2000 SG&A expenses decreased approximately
$2.2 million. $.6 million of the decrease comes from reduced payroll and payroll
related costs, which is attributed to restructuring activities implemented in
1999. Approximately $1.2 million of the decrease relates to consulting fees
related to the installation of information systems and software developing costs
in 1999 that were not incurred in 2000. Results in the first quarter of 2000
include a $39 thousand tax benefit as compared to a $83 thousand tax provision
in the first quarter of 1999. The effective tax rate in the first quarter of
2000 was 30% as compared to 32.5%, excluding restructuring, in the same period
in 1999.
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 (now classified
as short-term because the Company has breached financial ratio covenants in the
senior note agreement), as well as other long-term debt amounting to $18.2
million. The Company also has a $30 million three year syndicated multi-
currency revolving Credit Agreement with four banks, which expires in November
2000. 65% of the shares of certain of the Company's foreign subsidiaries are
pledged as security for the lenders under the $50 million private placement and
the $30 million line of credit (the "Senior Lenders"). In addition to the $30
million revolving Credit Agreement, the Company has $24.6 million in lines of
credit with various banks located outside of the United States. At March 31,
1999, the Company had borrowed $27.4 million and $12.9 million under the
revolving Credit Agreement and foreign lines of credit, respectively. During
1999, the Company breached certain financial covenants relating to the debt to
EBITDA ratio, debt to net worth and the
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interest coverage ratios. The Company's Senior Lenders granted waivers curing
the financial covenant defaults incurred under its note and revolving credit
agreements through the end of 1999. In addition, borrowing rates under these
lending senior agreements with its principal lenders were increased, and these
lending agreements were amended to add covenants requiring the Company to grant
the Senior Lenders a security interest in its U.S. assets and to complete a
refinancing acceptable to the lenders by January 31, 2000. As of April 30, 2000,
the Company had not completed the refinancing of its senior debt and was in
violation of its senior note and revolving credit agreements. Management and a
Special Committee of three independent directors are working, subject to
definitive approval from the full Board of Directors ("Board") on the
transaction, to agree upon and complete a financing transaction to remedy the
Company's present default situation with respect to the loan covenants in its
senior note and revolving credit agreements and to resolve its existing
liquidity problem.
At April 30, 2000, the Company had $32.7 million of cash on hand and has been
meeting its normal cash needs. However, the Company is, as a result of recent
amendments to its loan agreements, prohibited from further borrowing under its
foreign credit lines. There can be no assurance that the lenders will continue
to make additional funds available to the Company under the revolving credit
($2.6 million was available for additional borrowing under the revolving Credit
Agreement) or that the Company will be able to complete a financing transaction
in an amount and upon terms, including the reset of its financial covenants,
satisfactory to Senior Lenders, including the application of the proceeds of any
such new financing to the partial payment of its existing debt under the senior
Note Agreement and under the revolving Credit Agreement (subject to being
reborrowed under the revolving Credit Agreement on the terms specified in the
Credit Agreement as to be amended). Until the financial covenants have been
reset and the defaults cured, the Company has classified the $50 million
obligation as a current liability. During this period of discussion with its
lenders, the Company is instituting additional cash management procedures. If
the Company's negotiations with the party or parties who might provide either
additional capital or other sources of financing and parallel negotiations with
its present set of lenders under the senior Note Agreement and lenders under the
revolving Credit Agreement are not successful with respect to the timely
issuance of the new financing and resetting the financial covenants under the
various noted 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 quarter of 2000 was $6.0 million,
as compared to net cash used in operations of $3.9 million in 1999. For the
quarter ended March 31, 2000, the net loss of $.1 million was decreased by
depreciation and other non-cash items of $3.5 million, including restructuring
benefits of $.5 million providing operating cash flows amounting to $3 million.
Cash flows in 2000 were further increased $2.6 million by a reduction in working
capital. For the quarter ended March 31, 1999, net loss of $15.0 million was
decreased by depreciation and other non-cash items of $19.6 million and was
increased in working capital of $8.5 million.
Net cash used in investment transactions was $2.9 million in 2000 and 1999.
Capital expenditures in 2000 and 1999 amounted to $1.9 million and $2.9 million,
respectively. Investment in other assets in 2000 included expenditures for
deferred charges relating to the debt refinancing activity; while in 1999, the
Company had insignificant investment transactions which offset each other.
Cash used in financing transactions was $.7 million during the first quarter of
2000 compared to cash provided by financing transactions of $2.2 million in the
same period in 1999. Financing transactions during 2000 consisted of principal
payments of long-term debt and short-term debt of $.7 million. Financing
transactions during the same period in 1999 consisted of an increase of $2.6
million in short-term borrowings offset by $.4 million of principal payments of
long-term debt.
Page 11
<PAGE>
Working Capital
Working capital decreased from $9.7 million at December 31, 1999 to $3.0 million
at March 31, 2000, principally due to a decrease in accounts receivable,
inventories, short-term debt, accounts payable and accrued expenses offset by an
increase in prepaid expenses. Inventories decreased to $62.6 million at March
31, 2000, which included a $2.5 million decrease of inventory of the Electronics
Division to reflect the fair value of the inventory at the acquisition date. The
remaining $3.2 million of inventory decrease results from the translation of
foreign inventory using lower exchange rates due to the continuous strengthening
of the U.S. dollar. Accounts receivable decreased $6.7 million from year end,
$2.4 million of the decrease is also due to translation of foreign accounts
receivable at lower foreign exchange rates. Total short-and long-term borrowings
decreased $1.7 million, $.9 million of which is due to foreign translation, and
accounts payable and accrued expenses decreased $3.7 million, $3.0 million of
which was due to foreign transaction, from year end 1999.
Product Design and Manufacturing Engineering
The Company invested $4.5 million, or 6.2% of sales, and $4.0 million, or 4.9%
of sales, respectively, for product design and manufacturing engineering for the
first quarter of 2000 and 1999.
RISK FACTORS
Indebtedness and Liquidity
As set forth in "Management's Discussion & Analysis - Liquidity and Capital
Resources," during 1999, the Company breached certain financial ratio covenants.
The Company received waivers curing the defaults through the end of 1999;
however, due to its inability to complete a financing transaction, the Company,
as of April 30, 2000, is in violation of its note and loan agreements with its
Senior Lenders. There can be no assurance the Company will be able to complete
a financing transaction which will remedy the present default situation and the
Company's existing liquidity problem, acceptable to the Senior Lenders or will
be able to 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 financing transaction
will either call for issuance of equity securities in a private placement (more
likely) or possibly subordinated debt with warrants to purchase shares of common
stock of the Company. If the Company is unable to complete a financing
transaction with equity (or subordinated debt with warrants) and its parallel
negotiations with both sets of its present Senior Lenders are not successful in
resolving these issues, the Company plans to seek other alternative financing.
However, it is also 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" and
Note 2 of the Financial Statements for the three-month period ended March 31,
2000.
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. 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
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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
affecting these industries in the various geographic areas.
As a consequence, the prices 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 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 March 31, 2000, approximately 64% (based on book values) of the
Company's assets, 53% of the Company's sales (based on customer location) and
64% 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.
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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.
Implementation of Company Strategy
The 1999 restructuring initiatives focus on three areas: (i) eliminating
unprofitable products in the CMD operation and reducing their break-even point;
(ii) closing high cost or duplicate PMI factories and outsourcing manufacturing
where appropriate, and (iii) creating focused factories and eliminating
overlapping products in the MS Group. Key elements of the Company's business
strategy for 2000 include the start of realization of the planned benefit of the
1999 restructuring and completion of the development and market introduction of
new products, which leverage off of the Company's proprietary technology and
expertise, including metrology tools for electronic component manufacturers, to
be sold by a unit acquired by the Company in 1999 and non-contact sensor
technology products and focusing, through the Company's subsidiary, Brown &
Sharpe Information Systems Inc. ("BSIS"), on software development to have a
single metrology operating platform which will be utilized on Brown & Sharpe
equipment and on equipment of other metrology manufacturers. There can be no
assurances that the Company will be able to achieve its planned objectives from
the 1999 restructuring or the new products under development.
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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A portion of the Company's consolidated long-term debt consists 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 affected 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.
Forward-Looking Information
This section and other portions of this report include certain forward-looking
statements about the Company's sales, expenditures, capital needs and various
risks and uncertainties, including those set forth in "Risk Factors." These
risks are discussed in "Risk Factors" in the Company's Report on Form 10-K for
the year 1999, and, in addition, with respect to the Euro Conversion issues
which is discussed below. Such statements in the Report on Form 10-K and in
this report are subject to risks that could cause the actual results or needs to
vary materially from those anticipated by the Company.
European Monetary Union
Effective January 1, 1999, eleven of fifteen member countries of the European
Union ("EU") established 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
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.
Some of the Company's current business operating software is not Euro
compliant. Two of the operations will acquire a software patch which will make
the software Euro compliant. Another operation is purchasing operating software
which is Euro compliant. The Company believes it will be completely Euro
compliant by the mandatory conversion date.
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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 March 31, 2000.
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)
May 11, 2000
Page 16
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
EXHIBIT INDEX
-------------
27. Financial Data Schedule.
Page 17
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> DEC-31-1999
<PERIOD-END> MAR-31-2000
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