-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KCFKjoaQNYBo26xVC+W6gqhuKSoTMxiwEO2p1pVMmQfnO8rBcAu6GnevpGKLJwcC q/aHVFKUYegX4ltft5GrIA== 0000927016-96-001723.txt : 19961115 0000927016-96-001723.hdr.sgml : 19961115 ACCESSION NUMBER: 0000927016-96-001723 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN & SHARPE MANUFACTURING CO /DE/ CENTRAL INDEX KEY: 0000014637 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 050113140 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05881 FILM NUMBER: 96661814 BUSINESS ADDRESS: STREET 1: PO BOX 456 STREET 2: PRECISION PK - 200 FRENCHTOWN RD CITY: NORTH KINGSTOWN STATE: RI ZIP: 02852 BUSINESS PHONE: 4018862000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-5881 ------ BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 050113140 -------- --------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island 02852 - ------------------------------------------------------------------------------- (Address of principal executive offices and zip code) (401) 886-2000 -------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date; 12,206,407 shares of Class A common stock, 517,768 shares of Class B common stock, par value $1 per share, outstanding as of October 31, 1996. 1 PART I. FINANCIAL INFORMATION --------------------- Item 1. FINANCIAL STATEMENTS* - ------ -------------------- BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (Dollars in Thousands Except Per Share Data) (Unaudited)
For the Quarter Ended Sept. 30, For the Nine-Months Ended Sept. 30, -------------------------------- ------------------------------------ 1996 1995 1996 1995 ---------------- -------------- ----------------- ----------------- Net sales $83,791 $78,571 $249,904 $236,920 Cost of sales 57,759 54,263 171,452 162,437 Selling, general and administrative expense 22,971 21,781 68,075 68,361 Restructuring charges - 89 - 336 ------- ------- -------- -------- Operating profit 3,061 2,438 10,377 5,786 Interest expense 2,031 2,787 6,584 6,735 Other income, net 151 569 320 959 ------- ------- -------- -------- Income before income taxes 1,181 220 4,113 10 Income tax provision (benefit) (76) 0 452 200 ------- ------- -------- -------- Net income (loss) $ 1,257 $ 220 $ 3,661 $ (190) ======= ======= ======== ======== Primary and fully diluted income (loss) per common share: Net income (loss) per share $ .14 $ .03 $ .41 $ (.02) ======= ======= ======== ======== Weighted average shares outstanding and common stock equivalents during the period 8,885,696 8,779,246 8,884,669 8,692,584
* The accompanying notes are an integral part of the financial statements. 2 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ CONSOLIDATED BALANCE SHEET -------------------------- (Dollars in Thousands)
Sept. 30, 1996 December 31, 1995 --------------- ------------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 5,387 $ 6,262 Accounts receivable, net of allowances for doubtful accounts of $2,947 and $3,030 122,728 113,579 Inventories 94,398 88,558 Deferred income taxes 3,996 3,322 Prepaid expenses and other current assets 5,490 5,436 -------- -------- Total current assets 231,999 217,157 Property, plant and equipment: Land 6,916 7,141 Buildings and improvements 43,251 37,447 Machinery and equipment 91,717 95,482 -------- -------- 141,884 140,070 Less-accumulated depreciation 87,796 87,183 -------- -------- 54,088 52,887 Goodwill, net 11,130 11,529 Other assets 13,904 13,827 -------- -------- $311,121 $295,400 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES: Notes payable and current installments of long-term debt $ 67,585 $ 45,229 Accounts payable 52,125 44,936 Accrued expenses and income taxes 36,236 39,423 -------- -------- Total current liabilities 155,946 129,588 Long-term debt 40,849 56,839 Other long-term liabilities 6,755 6,310 Deferred income taxes 2,766 2,765 Unfunded accrued pension cost 5,805 5,823 Termination indemnities 8,858 8,218 SHAREOWNERS' EQUITY: Preferred stock, $1 par value; authorized 1,000,000 shares - - Common stock: Class A, par value $1; authorized 15,000,000 shares; issued 8,243,718 shares in 1996 and 8,195,795 shares in 1995 8,244 8,196 Class B, par value $1; authorized 2,000,000 shares; issued and outstanding 519,299 shares in 1996 and 522,575 shares in 1995 519 523 Additional paid in capital 67,254 66,863 Earnings(deficiency) employed in the business (4,371) (8,032) Cumulative foreign currency translation adjustment 19,110 18,926 Treasury stock: 42,592 shares in 1996 and in 1995 at cost (455) (270) Unearned compensation (159) (349) -------- -------- Total shareowners' equity 90,142 85,857 -------- -------- $311,121 $295,400 ======== ========
* The accompanying notes are an integral part of the financial statements. 3 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Dollars in Thousands) (Unaudited)
For the Nine-Months Ended Sept. 30, ------------------------------------- 1996 1995 ------------------ ----------------- CASH PROVIDED BY (USED IN) OPERATIONS: Net income (loss) $ 3,661 $ (190) Adjustment for Noncash Items: Depreciation and amortization 5,934 7,482 Unfunded pension 327 314 Deferred compensation 189 - Termination indemnities 287 196 Changes in Working Capital: (Increase) Decrease in accounts receivable (11,313) 3,579 Increase in inventories (8,817) (4,939) Increase in prepaid expenses and other current assets (143) (393) Increase (decrease) in accounts payable and accrued expenses 3,820 (9,190) -------- ------- Net Cash (Used in) Provided by Operations (6,055) (3,141) -------- ------- INVESTMENT TRANSACTIONS: Capital expenditures (7,675) (5,372) Other investing activities (271) 293 -------- ------- Cash (Used in) Investment Transactions (7,946) (5,079) -------- ------- FINANCING TRANSACTIONS: Increase in short-term debt 7,915 7,943 Proceeds from issuance of long-term debt 2,979 - Principal payments of long-term debt (2,855) (3,076) Other financing activities 250 557 -------- ------- Cash Provided by Financing Transactions 8,289 5,424 -------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,837 1,131 -------- ------- CASH AND CASH EQUIVALENTS: Increase (decrease) during the period (875) (1,665) Beginning balance 6,262 6,676 -------- ------- Ending balance $ 5,387 $ 5,011 ======== ======= SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid $ 5,339 $ 4,629 ======== ======= Taxes paid $ 685 $ 1,703 ======== =======
* The accompanying notes are an integral part of the financial statements. 4 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Dollars in Thousands) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine-month period ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Brown & Sharpe Manufacturing Company's annual report on Form 10-K for the year ended December 31, 1995. 2. Cash and cash equivalents are comprised of cash-on-hand deposits in banks and short-term marketable securities with a maturity at acquisition of three months or less. Cash also includes $1.4 million of cash pledged to support bid bonds and performance bonds issued by a bank. 3. The composition of inventory is as follows:
Sept. 30, 1996 Dec. 31, 1995 -------------- ------------- Parts, raw materials, and supplies $39,816 $39,857 Work in process 16,758 15,906 Finished goods 37,824 32,795 ------- ------- $94,398 $88,558 ======= =======
4. Income taxes include provisions for federal, foreign and state income taxes and are based on the Company's estimate of effective income tax rates for the full year. The tax provision for the first nine-months of 1996 and 1995 is $452 and $200, respectively. The estimate of the 1996 effective tax rate was revised during the three month period ended September 30, 1996, reflecting a reduction in projected taxable income in certain foreign jurisdictions where tax expense was previously anticipated. As a result of the change in the estimated effective rate, net income for the three months ended September 30, 1996 increased $289 ($.03 per share). 5. Primary and fully diluted earnings per share for the quarter and nine- months ended September 30, 1996 is based upon the weighted average number of common shares outstanding and common stock equivalents. For the quarter ended September 30, 1995, earnings (loss) per share was based upon the weighted average number of common shares outstanding and common stock equivalents. For the nine-months ended September 30, 1995, earnings (loss) per share was based upon the weighted average number of common shares outstanding since inclusion of common stock equivalents would be antidilutive. 6. Labor Relations. The Company is involved in litigation stemming from an October 1981 strike by employees represented by the International Association of Machinists and Aerospace Workers ("IAM") at the Company's Rhode Island operations. Following the strike, the IAM filed charges with the National Labor Relations Board ("NLRB") alleging that the Company engaged in unfair labor practices which precipitated the strike. On August 28, 1990, the NLRB dismissed the IAM's charges. The IAM appealed this decision to the U.S. Court of Appeals for the District of Columbia Circuit. On November 29, 1991, the Court accepted the legal reasoning advanced by the NLRB and the Company in support of the NLRB's 1990 decision, but ordered the NLRB to 5 further clarify and support its decision. The NLRB reaffirmed its original dismissal of the IAM's charges, and the IAM appealed that decision. The Court, on April 7, 1995, vacated the NLRB's earlier decision favorable to the Company and remanded the case to the NLRB for a decision on whether the charges should be dismissed or a trial on the merits should proceed. On August 16, 1996, the NLRB issued a second supplemental decision and order finding in favor of the Company and dismissed the IAM complaint. The IAM has filed a motion with the NLRB requesting a re-hearing and reconsideration of its ruling. Should the motion be denied, the IAM could once again appeal such ruling to the U.S. Court of Appeals. The Company will continue to defend this case vigorously and, management continues to believe that the possibility of an adverse decision in this matter is remote. If the case were ultimately decided against the Company, the Company could be liable for back wages, subject to mitigation for certain statutory offsets, for all union members whose strike is based on such alleged unfair labor practices. Environmental. The Company is involved in a lawsuit which arose out of an environmental proceeding in which the United States Environmental Protection Agency ("EPA") identified the Company as a potentially responsible party ("PRP") at a waste disposal site (the "Site") in Rhode Island listed on the EPA's National Priority List for clean-up and future monitoring remedial action under the Superfund legislation. The Company's proportionate share of the total waste contributed to the Site was minimal in volume and toxicity, and the Company was permitted by the EPA to settle its liability at such Site in exchange for releases from the EPA and the State of Rhode Island and for contribution protection from claims of any third parties who may have liability at the Site. A group of non-settling major PRPs at the Site brought suit in the Federal District Court in Rhode Island on January 2, 1991 against all of the settling parties, including the Company, to recover a portion of their past and anticipated future costs of performing the clean-up remedy. The Court entered a summary judgment in favor of the Company and other settling parties on October 30, 1992. The non-settling group of major PRPs appealed that ruling and brought suit against the EPA seeking to have the settlements of the de minimis settling parties set aside. The Company is vigorously defending this lawsuit and believes that given the release and contribution protection obtained from the EPA in connection with settlement of its liability at the Site, the cost-recovery claim will ultimately be barred. On March 1, 1995, the Company received a notice from the State of New York asserting a claim against it, along with a group of approximately ten other companies, to recover costs incurred by the New York State Department of Environmental Conservation to clean up a waste disposal site in Poughkeepsie, New York. The State has alleged that the Company's former subsidiary, Standard Gage Company, Poughkeepsie, New York, acquired in 1987 and merged with and into the Company in 1991, contributed hazardous waste to the site for disposal and that the Company is a PRP as the surviving corporation to the merger. The total claim asserted by the State against all parties is approximately $500,000, and it has expressed a willingness to settle its claim with all PRPs receiving the notice. The Company is continuing to investigate the basis for this claim and estimates that any potential loss it might incur as a result of any involvement or settlement at this site would not be material. Product Liability and Other Litigation Incidental to the Business. The Company is involved in a number of product liability claims and lawsuits by plaintiffs seeking monetary damages for personal injury which arose out of and were incidental to the sale of products manufactured by the Company in its discontinued metal cutting machine tool and hydraulic businesses and certain other litigation and claims incidental to the conduct of its business. The potential liability of the Company for these claims and suits is adequately covered by insurance or reserves established for such contingencies. The Company is contesting or defending these claims and suits and management believes that the ultimate liability, if any, resulting from these matters will not have a material effect on the Company's financial position. 7. During the third quarter of 1996, the Company recognized net income of a $0.2 million ($.02 per share) arising from the reacquisition of common stock that represents the reimbursement of 6 expenses that resulted from the 1994 acquisition of the Roch business from Diehl as provided for in the warranty provision of the Acquisition Agreement between the Company and Diehl. 8. Subsequent Events. During October, the Company completed a public offering in which it issued 4,424,321 shares of Class A common stock which resulted in net proceeds of $48.9 million. For additional information on the public offering, reference is made to the Company's Registration Statement on Form S-1 No. 333-1075, which became effective on October 10, 1996. The following is a Pro Forma Balance Sheet assuming the pubic offering and application of $33.5 million of the $48.9 million of net proceeds from the offering were used to pay notes payable and a portion of current installments of long-term debt had occurred on September 30, 1996:
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19,965 Accounts receivable 122,728 Inventories 94,398 Other current assets 9,486 -------- Total current assets 246,577 Property, plant and equipment, net 54,088 Other assets 25,034 -------- $325,699 ======== LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES: Current installments of long-term debt $ 33,944 Accounts payable and other 88,361 -------- Total current liabilities 122,305 Long-term debt and other liabilities 65,033 SHAREOWNERS' EQUITY: Common stock 13,187 Additional paid in capital 111,049 Earnings (deficiency) employed in the business (4,371) Other equity items 18,496 -------- Total shareowners' equity 138,361 -------- $325,699 ========
The following shows Pro Forma Results of Operations for the nine-months ended September 30, 1996 assuming that the public offering described above had occurred on January 1, 1996: Pro Forma Results of Operations --------------------- Net Income $5,922 Net Income Per Share $.46 7 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ The following table sets forth the percentage of net sales of Brown & Sharpe represented by the components of income and expense for the quarters and nine- months ended September 30, 1996 and 1995:
Quarters Ended Sept. 30 Nine-Months Ended Sept. 30 ------------------------- ---------------------------- 1996 1995 1996 1995 ------------ ----------- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 68.9 69.1 68.6 68.6 Selling, general and administrative expense 27.4 27.7 27.2 28.9 Restructuring charges 0.0 0.1 0.0 0.1 ----- ----- ----- ----- Operating profit 3.7 3.1 4.2 2.4 Interest expense 2.4 3.5 2.6 2.8 Other income (expense), net 0.2 0.7 0.1 0.4 ----- ----- ----- ----- Income before income taxes 1.5 0.3 1.7 0.0 Income tax provision (benefit) (0.1) 0.0 0.2 0.1 ----- ----- ----- ----- Net income (loss) 1.6% 0.3% 1.5% (0.1)% ===== ===== ===== =====
RESULTS OF OPERATIONS (Quarter Ended September 30, 1996 compared to Quarter Ended September 30, 1995) NET SALES. Net sales in the third quarter of 1996 increased 6.6% to $83.8 million, from $78.6 million in the third quarter of 1995. Foreign currency exchange rate fluctuations caused a decrease, on a dollar denominated basis, in net sales in the third quarter of 1996 of $1.8 million as compared to the third quarter of 1995. When translated at 1995 foreign exchange rates, third quarter 1996 net sales increased approximately $7.0 million or 9.0% from third quarter 1995 sales. The $7.0 million increase is comprised of a $7.4 million increase in Measuring Systems Division ("MS"), a $0.6 million increase in Precision Measuring Instruments Division ("PMI"), and $1.0 million decrease in the Custom Metrology Division ("CM") and other miscellaneous sales. The increase in MSD net sales was largely due to sales of the smaller machines manufactured in the U.S., as well as increased sales of more fully configured machines with higher sales prices than the prior period. The increase in PMI Division net sales was primarily due to increased unit volume in the United States that was partially offset by a decrease in volume in other markets. The decrease in CM Division net sales was due to reduced sales of special gauging machines. GROSS PROFIT. Gross profit increased 7.0% from $24.3 million in the third quarter of 1995 to $26.0 million in the third quarter of 1996. As a percentage of net sales, gross profit margin increased to 31.1% of sales in the third quarter of 1996 from 30.9% in the third quarter of 1995. MSD's margin increased in 1996 but was offset by a decrease in PMI and CM margins. The MS Group's margin increased due to improved product mix, which was partially caused by increased sales of more fully configured machines with higher sales value. In addition, increased revenue from after-market service contributed to the improved margin at MSD. Partially offsetting those increases was PMI's decreased profit margin. The PMI decrease resulted from a planned reduction of inventory levels which resulted in reduced production levels, less fixed overhead cost absorption, and lower margin in the third quarter. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense ("SG&A") in the third quarter of 1996 was $23.0 million or 27.4% of net sales, representing an increase from $21.8 million or 27.7% of net sales in the comparable period in 1995. Exclusive of foreign currency transaction losses, which amounted to a $0.1 million loss in 1996 and $1.3 million loss in 1995, SG&A increased from 26.1% of sales in 1995 to 27.3% of sales in 1996. MSD and PMI's SG&A increased $1.2 million 8 while CM's SG&A decreased $0.1 million compared to the third quarter of 1995. MSD's change was due, in part, to increased sales commissions, while PMI's increase was due to various increased expenses. OPERATING PROFIT (LOSS). As a result of the foregoing, operating profit increased 29.2%, or $0.7 million, from $2.4 million in the third quarter of 1995 to $3.1 million in the third quarter of 1996. INTEREST EXPENSE. Interest expense decreased 28.6%, or $0.8 million, from $2.8 million in the third quarter of 1995 to $2.0 million in the third quarter of 1996. The decrease reflects lower average interest rates offset by increased average borrowings of $5.5 million in the third quarter of 1996 over borrowings in the third quarter of 1995, which resulted from additional working capital requirements and financing for the CM Division's new facility in Telford, England. INCOME TAX EXPENSE. Income taxes include provisions for federal, foreign and state income taxes and are based on the Company's estimate of the effective income tax rates for the full year. The estimated 1996 effective tax rate amounted to 11.0% which compared with the effective tax rate of 26.6% for the year ended December 31, 1995. The reduction in the effective tax rate in 1996 from the year ended December 31, 1995 is attributable to income earned in tax jurisdictions in which net operating loss carryforwards will be recognized in 1996. During the third quarter, the 1996 estimated annual effective tax rate has been revised from 18%, which was used for the six month period ended June 30, 1996, to 11%, reflecting a reduction in projected taxable income in certain foreign jurisdictions where tax expense was previously anticipated. The change in the estimated effective tax rate increased net income in the third quarter of 1996 by $0.3 million ($.03 per share). NET INCOME (LOSS). As a result of the preceding factors, the Company had net income of $1.3 million ($.14 per share) in the third quarter of 1996 compared to a net income of $0.2 million ($.03 per share) in the third quarter of 1995. RESULTS OF OPERATIONS (Nine-Months Ended September 30, 1996 compared to Nine-Months Ended September 30, 1995) NET SALES. Net sales in the first nine-months of 1996 increased 5.5% or $13.0 million over the first nine-months of 1995, increasing from $236.9 million in 1995 to $249.9 million in 1996. Foreign currency exchange rate fluctuations caused a decrease in net sales of $3.4 million in the first nine-months of 1996 as compared to the first nine-months of 1995. Excluding these foreign currency effects, net sales increased $16.4 million over the first nine-months of 1995. The MS Group was responsible for $13.5 million of the $16.4 million increase, and approximately $3.0 million of the increase came from the PMI Division. The increase was largely due to shipments of the smaller machines manufactured in the U.S., as well as increased sales of more fully configured machines with higher sales prices than the prior period. PMI Division sales increased due to increased unit volume in the United States and price increases worldwide. GROSS PROFIT. Gross profit increased $4.0 million, or 5.4%, from $74.5 million in the first nine-months of 1995 to $78.5 million in the first nine-months of 1996. As a percentage of net sales, gross profit margin was 31.4% in the first nine-months of 1996 and 1995, over which period the MS Group margin and the PMI Division's margin remained approximately the same while the CM Division's margin increased slightly. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense ("SG&A") as a percentage of net sales decreased to 27.2% in the first nine-months of 1996 from 28.9% in the first nine-months of 1995. Exclusive of foreign currency transaction gains or losses, which amounted to a $0.8 million loss in 1996 and a $0.6 million gain in 1995, SG&A decreased as a percentage of net sales from 29.1% of sales in 1995 to 26.9% of sales in 1996. PMI's SG&A increased $0.8 million while the MS Group's SG&A decreased $1.3 million compared to the same period in 1995. PMI's increase 9 is due, in part, to a restructuring charge. The decrease in SG&A for the MS Group as a percentage of net sales was primarily attributable to reduced advertising and administrative expenses offset in part by increased sales commissions. OPERATING PROFIT. As a result of the foregoing, operating profit increased 79.3%, or $4.6 million, from $5.8 million for the nine months of 1995 to $10.4 million in the nine months of 1996. INTEREST EXPENSE. Interest expense decreased $0.1 million, in the first nine- months of 1996 over interest expense in the first nine-months of 1995, decreasing from $6.7 million to $6.6 million. Average borrowings increased $6.6 million over the comparable period in 1995, which resulted from additional working capital requirements and financing for a new facility in Telford, England, and were offset by a decrease in average interest rates. INCOME TAX EXPENSE. Income taxes include provisions for federal, foreign and state income taxes and are based on the Company's estimate of the effective income tax rates for the full year. The estimated 1996 effective tax rate amounted to 11.0% which compared with the effective tax rate of 26.6% for the year ended December 31, 1995. The reduction in the estimated effective tax rate in 1996 from the year ended December 31, 1995 is attributable to income earned in tax jurisdictions in which net operating loss carryforwards will be recognized in 1996. NET INCOME (LOSS). As a result of the preceding factors, the Company had net income of $3.7 million ($.41 per share) in the first nine-months of 1996 compared to a net loss of $0.2 million ($.02 per share) in the first nine-months of 1995. LIQUIDITY AND CAPITAL RESOURCES Over the last several years, the Company has funded its working capital, capital expenditure, research and development and other cash needs from operating cash flows, proceeds from the sale of discontinued businesses, borrowings under credit facilities and an aggregate of $33.5 million of term and mortgage indebtedness incurred in 1994. At September 30, 1996 the Company's outstanding indebtedness was $108.4 million including $74.9 million of long term indebtedness (including current portion) and $33.5 million of short-term borrowings. Short term borrowings consisted of $16.6 million of borrowings pursuant to a renewable secured three-year revolving credit facility, originally entered into on June 30, 1993, (the "Facility") and $16.9 million of borrowings pursuant to foreign credit facilities. The Company's cash and cash equivalents were $5.4 million including restricted cash of $1.4 million. During the first six months of 1996, the Company refinanced $12.2 million of Swiss mortgages which now mature June 2000 and June 2001. The Facility provides for maximum aggregate borrowing of $25.0 million and is a renewable, secured, revolving credit facility which is provided by a domestic financial institution. Foreign credit facilities provide for maximum aggregate borrowings of $48.3 million. The Facility is available for working capital and general corporate purposes and $23.0 million of foreign credit facilities are available for working capital and general corporate purposes in the countries in which the loan was originated by the local subsidiary, $19.6 million of the foreign credit facilities are available on presentment of eligible invoices for discounting and $5.7 million of the foreign credit facilities are available to support letters of credit and performance and bid bonds. Actual availability under the Facility is limited on the basis of eligible United States accounts receivable and inventory. At September 30, 1996, giving effect to such borrowing base limitations and outstanding borrowings, but prior to the public offering of common stock of the Company completed in October, 1996, the Company's maximum available additional borrowings under the Facility were $3.3 million and its maximum available additional borrowings under its foreign credit facilities were $28.4 million. The commitments under the Facility continue until September 1997 and automatically renew thereafter for one year periods, subject to the termination provisions contained in the Facility. The Facility is secured by substantially all of the Company's domestic assets and shares in some of its foreign subsidiaries and contains a number of covenants, including the obligations to maintain certain financial ratios and a prohibition on the payment of dividends. The Company's foreign credit facilities are generally due on demand and certain of such facilities are secured by certain of the Company's foreign 10 assets. An aggregate of $25 million of term indebtedness incurred by the Company in 1994 (and guaranteed by Finmeccanica) will mature in September 1997. On March 30, 1996, June 30, 1996, and September 30, 1996, the Company breached the current ratio covenant contained in the Facility. Such breaches were waived. There can be no assurance that the Company will not breach this covenant in the future. The Company's growth during 1995 and the first nine months of 1996 has increased its working capital requirements. In order to fund such increased working capital requirements, during the first nine months of 1996, the Company restricted planned capital expenditures and funding for certain other projects planned to achieve cost reductions and growth. In October 1996, the Company completed an underwritten public offering in which it sold 4,424,321 newly issued shares of Class A common stock for net proceeds amounting to $48.9 million. Immediately thereafter, the Company paid off its entire short-term borrowings and some current portion of long-term debt, other than the $25 million (guaranteed) term debt which became short term during September, 1996, amounting to $33.5 million and invested the balance of cash received from the stock offering in short-term securities, which is available for working capital and capital expenditures. CASH FLOW. Net income of $3.7 million for the first nine months of 1996 increased by depreciation and other non-cash items amounting to $6.7 million and offset by increases in working capital amounting to $16.5 million resulted in operations in the first half of 1996 using $6.1 million of cash. In the first nine months of 1995, increased working capital of $10.9 million resulted in $3.1 million of cash being used by operations. In the first nine months of 1996, investment transactions used cash of $7.9 million, of which capital expenditures were $7.7 million, as compared with depreciation of $4.8 million in the first nine months of 1996. This compares to investment transactions using cash of $5.1 million in the first nine months of 1995 of which capital expenditures amounted to $5.4 million and depreciation amounted to $6.7 million. Cash provided from financial transactions was $8.3 million in the first nine months of 1996 compared with $5.4 million in the first nine months of 1995. 1996 financial transactions consisted of a $7.9 million increase in short-term borrowings and $3.0 million of long-term debt to finance the Telford facility described below and the repayment of $2.9 million of long-term debt. 1995 financing transactions included $7.9 million of short-term borrowings offset by $3.1 million of long-term debt payments. WORKING CAPITAL. Working capital was $76.1 million at the end of the first nine months of 1996 compared to $87.6 million at the end of 1995. Inventories increased to $94.4 million at September 30, 1996, an increase of $5.8 million from the end of 1995, and accounts receivable increased to $122.7 million from year end 1995. Also, notes payable and current installments of long-term debt increased $22.4 million, which resulted from a reclassification to current status of $25.0 million of long-term debt that is payable in September 1997 and net increased borrowings of notes payable and current installments of long-term debt of $5.1 million offset by reductions in notes payable and current installments of long-term debt of $7.7 million due to foreign exchange fluctuations. CAPITAL EXPENDITURES. The Company's capital expenditures, net of disposal proceeds, were approximately $7.7 million in the first nine months of 1996, of which $4.2 million was for the new facility in England, compared to $5.4 million in the first nine months of 1995. Management estimates that capital expenditures for the remainder of 1996 will amount to approximately $3.0 million. Amounts spent on capital expenditures have been less than planned and may increase in the future. 11 PROSPECTIVE INFORMATION This section includes certain forward-looking statements about the Company's sales, expenditures and cost savings, operating and capital requirements and refinancings. Any such statements are subject to risks that could cause the actual results or needs to vary materially. These risks are discussed in "Risk Factors" in the Company's Report on Form 10-K for the year 1995. 12 PART II. OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS - ------ ----------------- On August 16, 1996, the National Labor Relations Board ("NLRB") issued a second supplemental decision and order finding in favor of the Company and dismissing unfair labor practice charges filed against the Company by the International Association of Machinists and Aerospace Workers ("IAM") relating to a strike by employees represented by the IAM at the Company's Rhode Island operations in October of 1981. The IAM has filed a request for re-hearing and reconsideration of the NLRB's decision and it has a right of appeal of the decision to the U.S. Court of Appeals should such request be denied. See footnote 6, Labor Relations to Part I Financial Statements. Item 6. EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- A. See Exhibit Index annexed. B. No Form 8-K was filed during the quarter ended September 30, 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. BROWN & SHARPE MANUFACTURING COMPANY By: /s/ Charles A. Junkunc ---------------------- Charles A. Junkunc Vice President and Chief Financial Officer (Principal Financial Officer) November 13, 1996 13 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ EXHIBIT INDEX ------------- 4. Indenture dated as of October 1, 1980 (including form of debenture) between the Company and Morgan Guaranty Trust Company of New York as trustee relating to 9-1/4% convertible subordinated debentures due December 15, 2005, originally filed as Exhibit (b) (1) to Form S-16 Registration Statement No. 2-69203 dated October 1, 1980 and incorporated herein by reference. The Registrant hereby agrees to furnish a copy to the Commission of other instruments defining the rights of holders of long-term debt, as to which the securities thereunder do not exceed ten percent of total assets on a consolidated basis. 10.77 Amendment dated September 12, 1996 to Richard F. Paolino's employment agreement. 11. Computation of Per Share Data for the nine-month periods ended September 30, 1996 and 1995. 14 EX-10.77 2 PAOLINO EMPLOYMENT AGREEMENT 09/12/96 EXHIBIT 10.77 ------------- AMENDMENT Amendment dated as of September 12,1996 to Employment Agreement dated March 14, 1988 (the "Employment Agreement") between Richard F. Paolino, residing at 16 Quincey Adams Road, Barrington, RI 02806 (the "Executive") and Brown & Sharpe Manufacturing Company, a Delaware corporation, with its principal place of business at 200 Frenchtown Road, North Kingstown, RI 02852 (the "Company"). WHEREAS, the parties wish to make certain clarifying amendments to the Employment Agreement. NOW THEREFORE, in consideration of these premises and the mutual promises, terms, provisions and conditions set forth below, the parties agree to the following amendments of the Employment Agreement: 1. The parties agree that if the Executive were to resign today, he would be entitled to treat his resignation as a "deemed termination" of his employment by the Company within the meaning of Section 4.4 of the Employment Agreement. 2. The parties agree that fundamental principles of the Employment Agreement as to severance and related matters shall apply and further agree that in order to provide for a clear understanding of the rights and obligations of the parties with respect to severance and related benefits upon a termination of employment and to reflect the amendments, the following is agreed to set for the current employment, salary, bonus and benefits for employment of the Executive after the date hereof and also the severances, benefits and other financial provisions which shall be applicable to a termination of the Executive's employment by resignation of the Executive or a termination by the Company (other than a termination by the Company for cause), and including without limitation a "deemed termination", shall be as follows: a. The Executive is entitled to monthly salary, payable in accordance with the Company's regular practice, at not less than the current annual rate and fringe benefits which shall be paid through the date of termination of the Executive's employment at any time up through September 28, 1997. b. The Executive is entitled to bonus payable in respect of the year 1996 at the higher of the amount payable under the PIP or the amount calculated as a percentage of base salary equal to the average of bonuses paid to him (including cash paid under the PIP) in respect of the 1993, 1994, and 1995 fiscal years. c. Contributions for the benefit of the Executive under the SARP and under the ESOP shall be made through the date of such termination of employment, and in addition through December 31, 1997 so long as the Executive is an employee on January 3, 1997 (and in that event computed as if the Executive had continued in employment at the current base salary rate through December 31, 1997). The Executive shall also be entitled to, together with his dependents and beneficiaries, participate in all life insurance plans, accident and health plans and other welfare plans maintained or sponsored by the Company. d. In addition, the Executive shall be entitled to a lump sum cash payment upon such termination of employment, payable within 30 days, equal to the sum of his highest annual base salary during the three year period immediately preceding the date of such termination of employment, the value of annual fringe benefits on the W-2 and the highest cash bonus received from the Company for any of the three fiscal years of the Company immediately preceding the date of such termination of employment. e. All stock options (other than 30,000 options granted in July, 1995) or restricted stock shall receive accelerated vesting. The stock options for 30,000 shares granted to the Executive in July 1995 shall receive accelerated vesting if the Executive remains an employee of the Company through January 3, 1997 (unless his employment has been terminated prior thereto by the Company for cause). The Executive shall not be entitled to any accelerated vesting under the Long Term Deferred Cash Incentive Plan upon any termination of employment. The Executive shall be entitled to additional stock grants only in the sole discretion of the Company. 3. The Executive shall be entitled to the severance and benefits set forth above with respect to a termination of employment by resignation of the Executive or a termination by the Company (other than a termination of employment by the Company for cause) at any time prior to September 28, 1997 (except as specifically otherwise provided with respect to the vesting options above). Nothing in the Employment Agreement or this Amendment shall govern the severance, fringes and benefits, etc. with respect to a termination of employment of the Executive taking place after September 28, 1997, and all salary, bonus, fringes and other benefits, including severance, with respect to any employment after September 28, 1997, shall be governed exclusively by such subsequent agreement as may be reached by the Company and the Executive relating to such period. 4. The Executive shall be bound by the covenant not to compete in the form previously set forth in the Employment Agreement during his period of employment by the Company and for one year following the date of termination of employment. In the event the Executive dies following a termination of employment which entitled him to the above payments and benefits but prior to receipt of all such payments and benefits, the principles of the Employment Agreement shall apply, namely, his beneficiary (as designated to the Company by letter) or, if none, his estate, will be entitled to receive all of the above amounts and benefits due but unpaid and his beneficiary or estate will be entitled to exercise options in accordance with the terms of the options and the Employment Agreement as amended by this Amendment. 5. It is confirmed that the provisions of Articles 6 through 12 of the Employment Agreement shall remain applicable and that the provisions of Article 5 are deleted. 6. The Executive shall be entitled to use the EAP services of the Company for twelve months from the date of such termination of employment in connection with his employment outplacement. The Executive shall also have access, on terms to be mutually agreed between the Executive and the Company's Chief Financial Officer, to secretarial services, either with the Company or outside, in connection with his employment outplacement activities for up to twelve months from the date of such termination of employment and shall be reimbursed for telephone bills of a second phone in his home, for business use, for such period. IN WITNESS WHEREOF, the Company and the Executive has each caused this Amendment to the Employment Agreement to be duly executed and delivered as of the date set forth above. EXECUTIVE BROWN & SHARPE MANUFACTURING COMPANY /s/ Richard F. Paolino By: /s/ Frank T. Curtin - ---------------------- ---------------------------------------- Richard F. Paolino EX-11 3 COMPUTATION OF PER SHARE DATA EXHIBIT 11 ---------- BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ COMPUTATION OF PER SHARE DATA ----------------------------- (Amounts in Thousands Except Per Share Data)
Quarter Ended Sept. 30 Nine-Months Ended Sept. 30 ---------------------- --------------------------- 1996 1995 1996 1995 ----------- --------- ------------- ------------ Primary: Average shares outstanding 8,729 8,695 8,735 8,693 Net effect of dilutive stock options -- based on the treasury stock method using average market price 157 85 149 - ------ ------ ------ ------ Totals 8,886 8,780 8,884 8,693 ====== ====== ====== ====== Net income (loss) $1,257 $ 220 $3,661 $ (190) ====== ====== ====== ====== Per share amount $ .14 $ .03 $ .41 $ (.02) ====== ====== ====== ====== Fully diluted: Average shares outstanding 8,729 8,695 8,735 8,693 Net effect of dilutive stock options -- based on the treasury stock method using ending market price which is greater than average market price 201 148 201 - Assumed conversion of 9 1/4% convertible subordinated debentures * * * * ------ ------ ------ ------ Totals 8,930 8,843 8,936 8,693 ====== ====== ====== ====== Net income (loss) $1,257 $ 220 $3,661 $ (190) Add 9 1/4% convertible subordinated debenture interest, net of federal income tax effect * * * * ------ ------ ------ ------ Totals $1,257 $ 220 $3,661 $ (190) ====== ====== ====== ====== Per share amount $ .14 $ .03 $ .41 $ (.02) ====== ====== ====== ======
* Conversion of the 9-1/4% convertible subordinated debentures is not assumed in the computation because its effect is anti-dilutive. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 DEC-31-1995 SEP-30-1996 5,387 0 125,675 (2,947) 94,398 9,586 141,884 87,796 311,121 155,946 0 0 0 8,763 81,379 311,121 249,904 249,904 171,452 171,452 67,755 0 6,584 4,113 452 3,661 0 0 0 3,661 .41 .41
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