<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, 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; 13,286,004 shares of Class A
common stock, 501,881 shares of Class B common stock, par value $1 per share,
outstanding as of September 30, 2000.
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS*
------ --------------------
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
--------------------------------- -------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 64,266 $ 72,712 $ 207,371 $ 236,778
Cost of sales - Notes 3 and 4 43,293 50,878 141,316 169,061
Research and development 3,873 2,582 9,813 7,872
Selling, general and administrative
expenses 18,585 20,196 57,296 64,347
Provision for Impaired Assets of
Electronics Division - Note 4 - - 7,637 -
Refinancing Fees 241 - 3,506 -
Restructuring (benefits) charges (766) 824 (1,238) 18,026
Impairment of partially-owned
affiliate - Note 5 5,687 - 5,687 -
----------- ----------- ----------- -----------
Operating loss (6,647) (1,768) (16,646) (22,528)
Interest expense 2,489 1,911 6,903 4,947
Other (income), net (16) (182) (757) (731)
----------- ----------- ----------- -----------
Loss before income taxes (9,120) (3,497) (22,792) (26,744)
Income tax provision (benefit) 411 (986) 2,106 (632)
----------- ----------- ----------- -----------
Net loss $ (9,531) $ (2,511) $ (24,898) $ (26,112)
=========== =========== =========== ===========
Net loss per common share:
Basic and diluted $ (0.69) $ (0.19) $ (1.82) $ (1.94)
=========== =========== =========== ===========
Weighted average shares
outstanding 13,787,885 13,464,863 13,700,847 13,445,139
=========== =========== =========== ===========
</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>
Sept. 30, 2000 December 31, 1999
--------------- ------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 29,794 $ 36,643
Accounts receivable, net of allowances for
doubtful accounts of $3,917 and $4,759 68,993 88,300
Inventories 59,853 68,310
Prepaid expenses and other current assets 5,853 5,553
-------- --------
Total current assets 164,493 198,806
Property, plant and equipment:
Land 2,844 6,510
Buildings and improvements 32,453 35,465
Machinery and equipment 89,179 94,011
-------- --------
124,476 135,986
Less-accumulated depreciation 85,817 88,667
-------- --------
38,659 47,319
Goodwill, net 8,665 11,145
Other assets 34,131 44,907
-------- --------
$245,948 $302,177
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Notes payable to banks, including in 2000,
$27,400 in default $ 38,445 $ 41,110
Accounts payable 39,466 41,916
Accrued expenses and income taxes 44,883 52,504
Notes payable and current
installments of long-term debt 54,380 53,585
-------- --------
Total current liabilities 177,174 189,115
Long-term debt 10,920 15,445
Long-term liabilities 24,184 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 13,328,596 shares
in 2000 and 13,010,623 shares in 1999 13,328 13,011
Class B, par value $1; authorized 2,000,000 shares;
issued and outstanding 501,881 shares in 2000
and 504,414 shares in 1999 502 504
Additional paid in capital 113,473 113,085
Retained earnings (deficit) (69,132) (44,234)
Other comprehensive (loss) income (24,046) (10,377)
Treasury stock: 42,592 shares in 2000 and
in 1999 at cost (455) (455)
-------- --------
Total shareowners' equity 33,670 71,534
-------- --------
$245,948 $302,177
======== ========
</TABLE>
Page 3
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Months Ended Sept. 30,
-----------------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS:
Net loss $(24,898) $(26,112)
Adjustment for Noncash Items:
Restructuring (benefits) charges (472) 15,784
Provision for impaired assets 7,637 -
Impairment of partially-owned affiliate 5,687 -
Depreciation and amortization 8,003 8,548
Unfunded pension 1,252 2,047
Termination indemnities 771 303
Other non-cash 141 -
Changes in Working Capital:
Decrease in accounts receivable 13,543 8,230
Increase in inventories (1,473) (5,646)
Increase in prepaid expenses and
other current assets (645) (1,068 )
(Decrease) increase in accounts payable and
accrued expenses (4,260) 4,144
-------- --------
Net Cash Provided by Operations 5,286 6,230
-------- --------
INVESTMENT TRANSACTIONS:
Capital expenditures (4,588) (7,253)
Sale of real estate 3,290 -
Acquisition, net of cash acquired - (9,241)
Investment in other assets (229) (4,044)
-------- --------
Cash (Used in) Investment Transactions (1,527) (20,538)
-------- --------
FINANCING TRANSACTIONS:
(Decrease) increase in short-term debt (1,666) 28,223
Principal payments of long-term debt (2,435) (2,513)
-------- --------
Cash (Used in) Provided by Financing Transactions (4,101) 25,710
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,507) (4,277)
-------- --------
CASH AND CASH EQUIVALENTS:
Decrease (increase) during the period (6,849) 7,125
Beginning balance 36,643 12,290
-------- --------
Ending balance $ 29,794 $ 19,415
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 5,404 $ 2,951
======== ========
Taxes paid $ 945 $ 1,144
======== ========
</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, 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.
The Company's net loss for the nine months of 2000 was $24.9 million and it
incurred an additional $13.6 million loss arising from foreign exchange
translation which also was recorded as Other Comprehensive Loss, reducing
shareholders' equity at September 30, 2000 to $33.7 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 September 30, 2000, and with
its private placement note holder who had provided $50 million of long-term
financing in 1997 (collectively the "Senior Lenders"). The 1999 operating
loss 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 November 13, 2000, the refinancing has not occurred
and the Company is also in default on the payment of the $27.4 million
revolving credit facility. As a result of the payment default, a $1.1 million
mortgage note payable by a United Kingdom subsidiary of the Company is also
in default and has been classified as a current liability.
In June 2000, the Company engaged Chase Securities Inc. to pursue various
strategic alternatives, including a possible sale or merger of the Company.
In addition, the Company is considering internal restructuring on its own,
including the sale of one or more units or selling a minority (or majority)
interest in certain non-core units that would increase the Company's cash
position and improve liquidity. However, there is no guarantee that a
strategic transaction will be completed or that any of the other transactions
described above will be completed and will be sufficient to meet the
Company's financial needs or that the Senior Lenders may not declare the bank
obligations and/or the notes to be immediately due and payable and have
resort to the collateral securing the Company's obligation.
Page 5
<PAGE>
At October 31, 2000, the Company had $26.0 million of cash on hand, of which
$10.8 million is not available for loans or advances to the parent company,
and has been meeting its normal cash needs. In addition, management has been
meeting its 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 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 must seek other strategic alternatives, including sale or merger of
the Company. However, it is not possible to predict whether any such
strategic alternative arrangements could be negotiated on satisfactory terms
and what would resolve the Company's defaults under the agreements with its
senior lenders and its present cash and liquidity problems.
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 nine months of 1999, the Company recorded a restructuring
charge of $26.3 million. An inventory adjustment of $8.2 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. The Company also realized a
net gain amounting to $.8 million in the quarter ended September 30, 2000,
arising from the sale of real estate located in the United Kingdom that was
closed as a result of the 1999 restructuring of its PMI division. In
addition, in the first nine months of 2000, the Company terminated 96
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 September 30, 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 (3,452) (2,823) (2,061) (2,035) (10,371)
Benefit - - - (472) (472)
Foreign exchange (149) (322) (221) (379) (1,071)
------- ------- ------- ------- --------
Balance Sept. 30, 2000 $ 3,159 $ 6,402 $ - $ 2,206 $ 11,767
======= ======= ======= ======= ========
</TABLE>
Cash payments amounting to $5.5 million relating to restructuring reserves
were disbursed in the first nine months of 2000, and further payments
amounting to approximately $2.1 million will be paid during the remainder of
2000. An additional $3.4 million will be paid in subsequent years.
4. The Board of Directors approved a plan to discontinue the operation of the
Electronics Division. As a result of the study to determine the future of
the Electronics Business, management concluded that the carrying value of the
Electronics Division exceeded the fair value of these assets and recorded a
$7.6 million charge in the second quarter of 2000 to adjust the carrying
value of the impaired assets to fair value. In the quarter ended September
30, 2000, management also adjusted inventory of the Electronics Division to
net realizable value and recorded a charge to cost of sales amounting to $.2
million and $.9 million in the previous quarter of 2000.
Page 6
<PAGE>
5. In the third quarter of 2000, management decided to discontinue the
development of noncontact sensor technology. As a result of this decision,
the Company wrote off its investment in its joint venture and certain other
costs that was dedicated to the development of the noncontact technology and
incurred a charge amounting to $5.7 million in the quarter ended September
30, 2000.
6. The composition of inventory is as follows:
<TABLE>
<CAPTION>
Sept. 30, 2000 Dec. 31, 1999
-------------- -------------
<S> <C> <C>
Parts, raw materials, and supplies $25,572 $29,591
Work in process 14,337 14,274
Finished goods 19,944 24,445
------- -------
$59,853 $68,310
======= =======
</TABLE>
7. 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.
8. 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,
--------------------------------- -------------------------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss (9,531) (2,511) (24,898) (26,112)
Denominator:
Denominator for basic earnings
per share:
Weighted - average shares 13,788 13,465 13,701 13,445
Effect of dilutive securities:
Employee stock options - - - -
------- ------- -------- --------
Denominator for diluted earnings
per share:
Weighted - average shares
and assumed conversions 13,788 13,465 13,701 13,445
======= ======= ======== ========
Basic Loss Per Share $ (.69) $ (.19) $ (1.82) $ (1.94)
======= ======= ======== ========
Diluted Loss Per Share $ (.69) $ (.19) $ (1.82) $ (1.94)
======= ======= ======== ========
</TABLE>
Page 7
<PAGE>
9. Components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended Sept. 30, For the Nine Months Ended Sept. 30,
--------------------------------- -------------------------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (9,531) $(2,511) $(24,898) $(26,112)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (6,804) 3,711 (13,669) (12,456)
-------- ------- -------- --------
Comprehensive loss $(16,335) $(1,200) $(38,567) $(38,568)
======== ======= ======== ========
</TABLE>
Accumulated other comprehensive (loss) income, net of related tax, at
September 30, 2000 and December 31, 1999 is composed of foreign currency
translation adjustments amounting to a loss of $24.0 million and $10.4
million, respectively.
10. 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.
11. 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"), Brown & Sharpe Information
Systems ("BSIS") and Electronics Division ("ED"). In the third quarter of
2000, Custom Metrology Division ("CM") has been combined with MS. All
information relating to CM has been combined with that of the Measuring System
Group.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, 2000
--------------------------------------------------
MS PMI BSIS ED TOTALS
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $48,181 $15,893 $ - $ 192 $64,266
Intersegment revenues 6 11 1,500 - 1,517
Restructuring benefit - 766 - - 766
Segment profit (loss) (6,980) 1,688 (2,362) (1,307) (8,961)
Three Months Ended Sept. 30, 1999
-------------------------------------------------
MS PMI BSIS ED TOTALS
-------- ------- ------- ------- --------
Revenues from
external customers $56,035 $15,698 $ - $ 979 $72,712
Intersegment revenues 36 55 - - 91
Restructuring provision 399 659 - - 1,058
Segment profit (loss) 1,176 (970) (1,471) (1,034) (2,299)
</TABLE>
Page 8
<PAGE>
11. Financial Information by Business Segment (continued)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30, 2000
---------------------------------------------------
MS PMI BSIS ED TOTALS
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $153,120 $54,036 $ - $ 215 $207,371
Intersegment revenues 16 44 4,500 - 4,560
Restructuring benefit 472 766 - - 1,238
Segment profit (loss) (5,666) 4,661 (7,062) (17,839) (25,906)
<CAPTION>
Nine Months Ended Sept. 30, 1999
--------------------------------------------------
MS PMI BSIS ED TOTALS
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $177,781 $58,018 $ - $ 979 $236,778
Intersegment revenues 152 274 - - 426
Restructuring provision (16,890) (6,898) - - (23,788)
Segment profit (loss) (11,276) (5,987) (3,613) (1,034) (21,910)
</TABLE>
A reconciliation of combined segment revenues to consolidated revenues and
operating profit to consolidated profit or loss before income taxes is as
follows for the MS, PMI, BSIS and ED segments:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Total revenues for reportable segment $ 65,783 $ 72,803
Elimination of intersegment revenues (1,517) (91)
-------- --------
Total Consolidated Revenues $ 64,266 $ 72,712
======== ========
Total loss for reportable segments $ (8,961) $ (2,299)
Unallocated amounts:
Interest income 442 45
Corporate allocations over (under) (136) (1,275)
Other income (expense) (465) 32
-------- --------
Loss Before Income Taxes $ (9,120) $ (3,497)
======== ========
<CAPTION>
Nine Months Ended Sept 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Total revenues for reportable segment $211,931 $237,204
Elimination of intersegment revenues (4,560) (426)
-------- --------
Total Consolidated Revenues $207,371 $236,778
======== ========
Total loss for reportable segments $(25,906) $(21,910)
Corporate restructuring charges - 2,484
Unallocated amounts:
Interest income 1,014 168
Corporate allocations over (under) 3,100 (2,394)
Other income (expense) (1,000) (144)
-------- --------
Loss Before Income Taxes $(22,792) $(26,744)
======== ========
</TABLE>
Page 9
<PAGE>
12. In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B
("SAB 101B"), SECOND AMENDMENT, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
SAB 101B delays the implementation date of SAB 101 for registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000.
Management believes that it is possible that the implementation of SAB 101
will have a material impact on the cumulative effect adjustment arising from
the adoption of the new accounting guidance. However, management is
presently unable to make a precise calculation until it is able to analyze
the recently issued guidance that interprets the requirements of SAB 101.
The Company will adopt SAB 101 pursuant to SAB 101B as required in the
fourth quarter of 2000 after it has completed its review of the effect of
the new pronouncement.
13. Certain amounts reported in 1999 have been reclassified to conform with the
2000 presentation.
Page 10
<PAGE>
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, 2000 compared to Quarter Ended September 30, 1999)
Sales
Sales for the third quarter of 2000 were $64.3 million compared with third
quarter sales in 1999 of $72.7 million, which is 11.6% below the 1999 level.
Third quarter sales for 2000 would have been $4.5 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 third
quarter sales are translated at the third quarter of 1999 exchange rates, 2000
sales amount to $68.8 million, a $3.9 million decrease over 1999. Beginning in
the third quarter of 2000, the Custom Metrology Division ("CM"), which
previously had operated as a separate division, was combined with the Measuring
Systems Division ("MS"). All discussion relating to the results of MS includes
the results of CM. For comparability purposes, prior period information has
been restated to reflect the results of the combined divisions. The $3.9 million
sales decrease noted above was caused primarily by a $4.5 million sales decrease
from the MS division and $.8 million from the Electronics Division ("ED") whose
operations were discontinued in the second quarter of 2000. The aggregate $5.3
million decrease was offset by a $1.4 million sales increase in the Precision
Measuring Instruments ("PMI").
The $4.5 million decrease in MS sales was primarily due to a decrease of $5.0
million of aftermarket revenues offset by a $.5 million increase of machine
sales in which sales of smaller CMM's increased slightly over 1999 levels while
sales of larger more-fully configured machines decreased. Sales for PMI were up
$1.4 million primarily due to increased sales in the Asian markets.
Restructuring
The following is an analysis of the restructuring reserves from December 31,
1999 to September 30, 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 (3,452) (2,823) (2,061) (2,035) (10,371)
Benefit - - - (472) (472)
Foreign exchange (149) (322) (221) (379) (1,071)
------- ------- ------- ------- --------
Balance September 30, 2000 $ 3,159 $ 6,402 $ - $ 2,206 $ 11,767
======= ======= ======= ======= ========
</TABLE>
Cash payments, including payments to 96 employees whose services were terminated
in the first nine months of 2000, amounting to $5.5 million relating to
restructuring reserves recognized in 1999 were disbursed in the first nine
months of 2000. Further payments amounting to approximately $2.1 million will
be paid during the remainder of 2000, and an additional $3.3 million will be
paid in subsequent years.
Page 11
<PAGE>
Earnings
The Company's net loss for the third quarter of 2000 was $9.5 million. The third
quarter net loss includes $5.7 million in charges relating to the writeoff of a
joint venture and certain other costs dedicated to the development of non-
contact sensor technology, as well as $.2 million of fees related to the due
diligence process with certain private equity investors and an $.8 million gain
arising from the sale of real estate used by its restructured PMI Division
located in the United Kingdom. Excluding the effect of the write-offs and gain
on sale of real estate, the third quarter loss would have been $4.4 million. The
Company's net loss for the third quarter of 1999 was $2.5 million which included
restructuring expenses of $1.0 million, net of taxes. Excluding the effect of
the restructuring expenses, the third quarter of 1999 would have realized a net
loss of $1.5 million.
The Company had an operating loss in the third quarter of 2000 of $6.6 million,
which included the $5.7 million of nonrecurring expenses discussed above. The
Company had an operating loss of $1.8 million in the third quarter of 1999,
which included $1.1 million of restructuring expenses. Excluding the effect of
the nonrecurring expenses and restructuring charges in the respective periods,
operating profit in 2000 is $.5 million lower than the same period in 1999. The
gross margin for the third quarter of 2000 was $21 million, which is 32.7% of
sales. The gross margin for the third quarter of 1999 was $21.8 million, which
included $.2 million of the $1.1 million restructuring expenses. When the $.2
million inventory adjustment is excluded from cost of goods sold, the 1999 gross
margin is $22.0 million or 30.3%. The reduced adjusted gross margin in 2000 was
primarily due to $.5 million and $1 million decreases for MS and ED,
respectively, offset by a $2 million improvement for PMI after adjusting for the
effects of foreign translation. The reduced margins for MS and ED were due to
lower sales volume, while improvement for PMI was due to greater efficiencies
arising from the benefits of the 1999 restructurings.
Selling, general and administrative expenses ("SG&A") for the third quarter of
2000 were 28.9% of sales as compared to 27.8% for the comparable period in 1999.
SG&A expenses for the third quarter of 2000 are $1.6 million less than the third
quarter of 1999. SG&A expenses for the third quarter of 2000 translated at the
third quarter of 1999 exchange rates were $.8 million less than the third
quarter of 1999. Most of the decrease comes from reduced payroll and payroll
related costs, which is attributed to restructuring activities implemented in
1999.
Interest expense in 2000 was $.6 million higher than 1999 due to increased
average borrowings and higher interest in 2000 resulting from the Company's
adverse financial situation.
Results in the third quarter of 2000 included a $.4 million tax provision as
compared to a $1.0 million benefit in the third quarter of 1999. The higher tax
provision in 2000 results from expected higher taxable income in certain
jurisdictions that would not be offset by tax benefits in other jurisdictions.
(Nine Months Ended September 30, 2000
Compared to Nine Months Ended September 30, 1999)
Sales
Sales for the first nine months of 2000 were $207.4 million compared with first
nine month sales in 1999 of $236.8 million, which is 12.4% below the 1999 level.
First nine months sales for 2000 would have been $11.1 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 denominator sales using lower
exchange rates, is due to the continued strength of the U.S. dollar. When 2000
first nine-month sales are translated at the first nine months of 1999 exchange
rates, 2000 sales amount to $218.5 million, a $18.3 million decrease over 1999.
The $18.3 million sales decrease was caused by a $16.7 million decrease for MS
and an $.8 million decrease for both PMI and ED.
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The $16.7 million decrease in MS sales was primarily due to a decrease of $13.2
million of aftermarket revenues, as well as a $3.5 million decrease in machine
sales in which a $7.6 million decrease in sales of larger more-fully configured
CMM's was offset by a $3.9 million increase in sales of smaller CMM's.
Sales for PMI were down due to restructuring in the United Kingdom and France
offset in part, by increased sales in the Japan markets. Sales for ED were
down because the operations were discontinued in the second quarter of 2000.
Earnings
The Company's net loss for the first nine months of 2000 were $24.9 million. The
net loss includes nonrecurring charges of $16.7 million, net $1.2 million in
restructuring benefits arising from the sale of real estate described above, and
a sublease entered into earlier in the year, relating to rental property that
was vacated as part of the restructuring that occured in 1999 and investment
write-offs including a $1.1 million writedown of inventory classified in cost of
sales, amounting to $8.9 million for its ED, which will be disposed of later in
2000. The nonrecurring charges also include a $5.6 million writeoff of certain
costs and an investment in a joint venture relating to the development of non-
contact sensor technology, which was discussed above, a $7.6 million provision
for impaired assets of its ED recorded in the second quarter of 2000 and $3.5
million of fees relating to refinancing activities occurring throughout 2000.
Excluding the effect of the one time write-offs and benefits, the first nine-
months of 2000 loss would have been $8.2 million.
The Company's net loss for the first nine months of 1999 was $26.1 million. The
first nine months net loss includes restructuring expenses of $25.8 million, net
of taxes. Excluding the effect of the restructuring expenses, the first nine
months of 1999 would have realized $.3 million of net loss.
The Company had an operating loss of $16.6 million in the first nine months of
2000. The operating loss includes $16.7 million of nonrecurring charges
discussed above. Excluding the effect of the nonrecurring charges, first nine
months 2000 operating loss would have been $.1 million. The Company had an
operating loss of $22.5 million in the first nine months of 1999, which included
$26.3 million of restructuring expenses. Excluding the effect of the
restructuring charge, first nine months operating profit would have been $3.8
million. The gross margin for the first nine months of 2000 was $66.1 million,
which included $1.1 million of the ED nonrecurring charges discussed above.
Excluding the effect of this charge in cost of goods sold, the 2000 gross margin
would be $67.2 million, which is 32.4% of 2000 sales. 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. The $8.8 decrease in gross margin is due
to lower margins in MS and ED of $9.4 million and $.6 million, respectively,
offset, in part, by increased margins in PMI of $1.3 million. The decreased
gross profit in MS is due to unfavorable absorption and reduced margins in
aftermarket services. The decrease in gross margin in ED is due to the
discontinuation of this line of business. PMI's gross margin is up due to the
benefits of the restructuring implemented in 1999.
Selling, general and administrative expenses ("SG&A") were 27.6% of sales as
compared to 27.2% for the comparable period in 1999. SG&A expenses for the
first nine months of 2000 are $7.0 million lower than the first nine months of
1999. If 1999 foreign exchange rates had been used to translate SG&A expenses
for the first nine months of 2000, 2000 SG&A expenses would have been $5.2
million lower than the same period for 1999. The first nine months of 2000
include approximately $2.2 million of expenses incurred by the Electronics
Division and Brown & Sharpe/Qianshao, which were acquired in 1999 and not
included in the entire nine months of 1999 results. Adjusting for the effect of
foreign translation and the two previously mentioned acquisitions, 2000 SG&A
decreased approximately $7.4 million. Approximately $4.8 million of the
decrease comes from reduced payroll and payroll related costs, which is
attributed to
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restructuring activities implemented in 1999. Another $2.6 million of the
decrease relates to consulting fees relating to the installation of information
systems and software developing costs in 1999 that were not incurred in 2000.
As discussed above, interest expense in 2000 was $2 million higher than 1999 due
to increased average borrowing and higher interest rates in 2000 resulting from
the Company's adverse financial situation.
Results for the first nine months of 2000 include a tax provision of $2.1
million as compared to $.6 million benefit in the comparable period of 1999.
The higher tax provision in 2000 results from higher taxable income in certain
jurisdictions that could not be offset by tax benefits in other jurisdictions.
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 and because of
the nonpayment default discussed below, a $1.1 million mortgage note on property
located in the United Kingdom which are classified as current liabilities, as
well as under other long-term debt amounting to $14.3 million. The Company also
has a $30 million three-year syndicated multi-currency revolving Credit
Agreement with four banks, which has a maturity and termination date of November
10, 2000. At October 31, 2000, only $27.4 million is available of the $30
million under the line of credit. 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 (collectively the
"Senior Lenders"). In addition to the $30 million revolving Credit Agreement,
the Company has $17.5 million in lines of credit with various banks located
outside of the United States. At September 30, 2000, the Company had borrowed
$27.4 million and $11.0 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 interest coverage ratios. The Company's Senior Lenders granted waivers
curing the financial covenant defaults incurred under the Company's note and
revolving credit agreements through the end of 1999. In addition, in November
1999, borrowing rates under these senior lending agreements with its Senior
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 November 13, 2000, this refinancing had not occurred.
Thus, as previously reported, since the summer of 1999, there has been an Event
of Default under its Revolving Credit Agreement with its banks, and the Company
has not been permitted to borrow any additional amount under the Revolving
Credit Agreement since that date. The maturity date of the revolving credit
agreement was November 10, 2000 and since the loan was not paid on that date,
there is now an additional Event of Default. Also, as previously reported, since
the summer of 1999, there has been an Event of Default under its privately
placed senior note agreements. The non-payment of the line of credit bank loan
constitutes an additional Event of Default under the note agreements. As has
been the case since the summer of 1999 with the prior and continuing Event of
Default under the note agreements, the noteholders may at any time declare the
notes to be immediately due and payable and may have resort to collateral
securing the Company's obligations to the noteholders under the note agreements
and related collateral agreements.
In June 2000, the Company engaged Chase Securities Inc. to pursue various
strategic alternatives, including a possible sale or merger of the Company. This
decision described in a June 2000 press release was made by the Board of
Directors following the termination of the due diligence process that the
Company had recently been engaged in with private equity investors that had been
considering making a substantial equity investment in the Company. In addition,
the Company is considering internal restructuring on its own, including the sale
of one or more units or selling a minority (or majority) interest in certain
non-core units that would increase the Company's cash position and improve
liquidity. However, there is no guarantee that a strategic transaction will be
completed or that any of the other transactions described above will be
completed and will be sufficient to meet the Company's financial needs or that
the Senior Lenders may not declare the bank obligations and/or the notes to be
immediately due and payable and have resort to the collateral securing the
Company's obligation.
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At October 31, 2000, the Company had $26 million of cash on hand and has been
meeting its normal cash needs. Included in the $26 million of cash at October
31, 2000, is $3.6 million of cash of its 60% owned subsidiary, Qingdao Brown &
Sharpe Qianshao Technology Company Limited, PRC, and 75% owned subsidiary,
Quingdao Brown & Sharpe Qianshao Trading Company Limited, PRC, which are located
in the People's Republic of China. Cash balances in China are subject to
currency exchange controls which limit the China's subsidiaries' ability to make
loans and advances to the Company. In addition, three of the Company's wholly-
owned European subsidiaries with cash balances amounting to $7.2 million at
October 31, 2000, have borrowings with local banks which restrict payments of
loans or advances to the Company by the subsidiaries. In addition, as a
practical matter, the business realities of the Company's operations through
subsidiaries in foreign countries, with credit lines of such subsidiaries from
foreign banks, restrict the ability of the Company to make long-term transfers
of cash in foreign countries into the United States. The Company is, as a
result of 1999 amendments to its agreements with the Senior Lenders, prohibited
from further borrowing by the Company or its subsidiaries under its foreign
credit lines. Until the financial covenants have been reset and the defaults
cured or waived, the Company has classified the $50 million Senior Note
obligation, as well as its $1.1 million mortgage in the United Kingdom 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 (as to which no such transactions are
pending as of November 13, 2000) or who might purchase one or more units of the
Company for cash or enter into a larger sale or merger transaction pursuant to
the Board's decision described in the Company's June 2000 press release are not
successful, and if 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 applicable loan documents
and extending the maturity of the Revolving Credit Agreement, the Company must
seek other strategic alternatives, including sale or merger of the Company.
However it is not possible to predict whether any such strategic alternatives
could be negotiated on satisfactory terms and what would resolve the Company's
defaults under the agreements with its Senior Lenders and its present cash and
liquidity problems.
Cash Flow
Net cash provided by operations in the first nine months of 2000 and 1999, are
$5.3 million and $6.2 million, respectively. For the nine months ended
September 30, 2000, the net loss of $24.9 million was decreased by depreciation
and other non-cash items of $23.0 million, including $13.3 million for impaired
assets and restructuring benefits of $.5 million. Cash flows in 2000 were
further increased $7.2 million by a reduction in working capital. For the nine
months ended September 30, 1999, net loss of $26.1 million was decreased by
depreciation and other non-cash items of $26.7 million, including restructuring
charges amounting to $15.8 million, and further decreased by reduction in
working capital of $5.6 million.
Net cash used in investment transactions was $1.5 million and $20.5 million in
2000 and 1999, respectively. Capital expenditures in 2000 and 1999 amounted to
$4.6 million and $7.3 million, respectively, as the Company curtailed spending
and investment in the first nine months of 2000. During 2000, the Company sold
real estate in the United Kingdom previously used by its restructured PMI
Division for cash amounting to $3.3 million. 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 $.9 million in marketable
securities to fund a defined benefit plan; and invested $1.7 million in
internally developed software costs.
Cash used in financing transactions was $4.1 million during the nine months of
2000 compared to cash provided by financing transactions of $25.7 million in the
same period in 1999. Financing transactions during 2000 consisted of principal
payments of long-term debt and short-term debt $2.4 million and payments of $1.7
million of short-term debt. Financing transactions during the same period in
1999 consisted of an increase of $28.2 million in short-term borrowings offset
by $2.5 million of principal payments of long-term debt.
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Working Capital
Working capital decreased from $9.7 million at December 31, 1999 to a negative
working capital of $12.7 million at September 30, 2000. When December 31, 1999
foreign exchange rates are used to translate the September 30, 2000 balance
sheet, working capital decreased to a negative $5.3 million. After using the
December 31, 1999 foreign exchange rates to translate the September 30, 2000
balance sheet, cash and accounts receivable decreased $4.8 million and $14.1
million, respectively, and accounts payable and accrued expenses decreased $4.4
million, which accounts for the most significant part of adjusted working
capital decrease of $14.9 million. In addition, $2.5 million of inventory at
December 31, 1999, that was acquired as a result of the purchase of the
Electronics Division, was adjusted to reflect the fair value of the inventory at
the acquisition date and was offset by various other changes in working capital.
Product Design and Manufacturing Engineering
The Company invested $13.2 million, or 6.4% of sales, and $10.6 million, or 4.5%
of sales, respectively, for product design and manufacturing engineering for the
first nine months of 2000 and 1999. Most of the 2000 increase resulted from the
Company's investment in Global measuring machines.
RISK FACTORS
Indebtedness and Liquidity
As set forth in "Management's Discussion & Analysis - Liquidity and Capital
Resources," during 1999 and continuing in 2000, 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, including the sale of equity (or possibly subordinated debt with
warrants) the Company, as of November 13, 2000, continues to be in violation of
financial ratio covenants in its note and loan agreements with its Senior
Lenders and is in default on its payment of its $27.4 million line of credit
under its Revolving Credit Agreement at November 13, 2000. There can be no
assurance the Company will be able to complete a financing transaction which
will remedy the present default situation, extend the maturity of its
obligations under the revolving credit, and remedy the Company's existing
indebtedness and 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 (and an extension
thereof) with its revolving credit lenders. The Company expects that the terms
of any such financing transaction will 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 such a financing transaction in a satisfactory amount (and no such
transaction is now under consideration) and if its parallel negotiations with
both sets of its present Senior Lenders are not successful in resolving these
issues under the Note Agreement and the Revolving Credit Agreement, the Company
must seek some form of strategic transaction alternative including possible sale
or merger of the Company. However, it is also not possible to predict whether
any such strategic alternative arrangements could be negotiated on satisfactory
terms sufficient to resolve the Company's defaults under the agreements with its
Senior Lenders and its present indebtedness and liquidity problem. For
additional details, see "Management's Discussion & Analysis - Liquidity and
Capital Resources" and Note 2 of the Financial Statements for the nine-month
period ended September 30, 2000, and Risk Factors - Recent History of Losses.
See Item 3 of Part II of this Report.
RECENT HISTORY OF LOSSES
The Company reported a 11.6% decrease in revenue for the third quarter of 2000
as compared to the third quarter of 1999. Net losses for the third quarter of
2000 and 1999, respectively, were $9.5 million and $2.5 million. For the first
nine months of 2000, the Company reported a 12.4% decrease in revenue as
compared to the first nine months of 1999. The net loss for the first nine
months of 2000 was $24.9 million as compared with a net loss of $26.1 million
for the first nine months of 1999.
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The Company's revenue decreased 4.6% during fiscal year 1999 as compared to
fiscal year 1998. The net loss in 1999 was $42.9 million. Continued negative
operating results could adversely impact the Company's relationships with
customers, vendors and employees, as well as its liquidity, its ability to
return to compliance with respect to the financial ratio covenants in its Senior
Note and Revolving Credit Agreement, its extension of the revolving Credit
Agreement, and its continued listing on the NYSE. The Company received a report
from its independent auditors for the year ended December 31, 1999, containing
an explanatory paragraph stating that the Company's operating loss and non-
compliance with certain covenants of loan agreements (see "Risk Factors--
Indebtedness and Liquidity") raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans to continue as a going
concern relies heavily on its ability to raise additional equity financing or,
alternatively, on its ability to sell one or more operating units (with
retention of some of the net proceeds of such sale or sales), or, subsequent to
the Board's decision in June 2000 to hire Chase Securities, Inc. to explore all
strategic alternatives for the Company to consummate a larger sales transaction,
possibly involving merger or sale of the entire Company. However, there can be
no guarantee that any of such refinancing transactions or such strategic
transactions will occur, or if they occur that the financial benefits from such
transaction will be sufficient in scope to meet the Company's liquidity and
other financial needs.
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 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.
Competitive pressures on pricing have intensified and the competition for orders
has increased, which is in part responsible for the recent lack of growth in
orders and shipments of the MS Group. 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.
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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 September 30, 2000, approximately 66% (based on book values) of the
Company's assets, 55% of the Company's sales (based on customer location) and
66% 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 other business factors in
foreign countries that may restrict the Company's ability to transfer cash from
one foreign country to another or the United States 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.
While the Company believes it has 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, 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.
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DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL
On April 28, 2000, Kenneth Kermes, then a newly-elected director, became
President and CEO, replacing Frank Curtin, who retired. 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's operations and its financial condition.
IMPLEMENTATION OF COMPANY STRATEGY
The 1999 restructuring initiatives focus on two areas: (i) closing high cost
or duplicate PMI factories and outsourcing manufacturing where appropriate, and
(ii) 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
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
software 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.
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.
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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. One of the operating companies has installed a software patch which
will make the software Euro compliant. The installation is currently being
tested for compliance. Another operation has purchased operating software which
is Euro compliant. The Company believes it will be completely Euro compliant by
the mandatory conversion date.
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PART II. OTHER INFORMATION
-----------------
Item 3. DEFAULT ON DEBT
Since the summer of 1999, certain financial ratio covenants also have been
violated default and the Company has not been permitted to borrow any additional
amount under the revolving credit agreement since that date. The maturity date
of the revolving credit agreement was November 10, 2000 and since the loan was
not paid on that date, there is now an additional Event of Default. As has been
the case since the summer of 1999 with the prior and continuing Event of
Default, the banks may, at any time, declare the loan to be immediately due and
payable and may have resort to the collateral securing the obligations to the
banks under the bank agreement and related collateral agreements. Also, as
previously reported, since the summer of 1999, there has been an Event of
Default thereunder under its privately placed note agreement. The non-payment of
the line of credit bank loan constitutes an additional Event of Default under
the note agreements. As has been the case since the summer of 1999 with the
prior and continuing Event of Default under the note agreements, the noteholders
may at any time declare the notes to be immediately due and payable and may have
resort to collateral securing the Company's obligations to the noteholders under
the note agreements and related collateral agreements.
Additional details are contained in Footnote 2 to the Financial Statements and
in "Management's Discussion and Analysis, Liquidity and Capital Resources" each
as set forth in Part I of the Report and hereby incorporated by reference.
Item 4. NONE
Item 5. NONE
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, 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)
November 13, 2000
Page 21
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
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EXHIBIT INDEX
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27. Financial Data Schedule.
Page 22
