-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jQa9KA3odCPVZONr3q9tRxZ9bKW5p0BsrXtmxOsSl5Xi4EL8R0xBGTpYpFleVVnY 6Qn8pST5hrdanth+l2Ihzw== 0000950146-95-000205.txt : 19950512 0000950146-95-000205.hdr.sgml : 19950512 ACCESSION NUMBER: 0000950146-95-000205 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950511 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARDINGE BROTHERS INC CENTRAL INDEX KEY: 0000313716 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 160470200 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-91644 FILM NUMBER: 95536913 BUSINESS ADDRESS: STREET 1: ONE HARDING DRIVE CITY: ELMIRA STATE: NY ZIP: 14902 BUSINESS PHONE: 6077342281 MAIL ADDRESS: STREET 2: ONE HARDINGE DRIVE CITY: ELMIRA STATE: NY ZIP: 14902 S-2/A 1 FORM S-2 As filed with the Securities and Exchange Commission on May 11, 1995 Registration No. 33-91644 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Hardinge Brothers, Inc. (Exact name of Registrant as specified in its charter)
New York 3541 16-0470200 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
One Hardinge Drive, Elmira, New York 14902-1507, (607) 734-2281 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) MALCOLM L. GIBSON Senior Vice President and Chief Financial Officer, Hardinge Brothers, Inc. One Hardinge Drive, Elmira, New York 14902-1507, (607) 734-2281 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: JONATHAN JEWETT LEONARD M. LEIMAN Shearman & Sterling Fulbright & Jaworski L.L.P. 599 Lexington Avenue 666 Fifth Avenue New York, New York 10022-6069 New York, New York 10103-3198 Approximate date of commencement of proposed sale to the public: As soon as practicable following the date on which this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. HARDINGE BROTHERS, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
Form S-2 Caption or Location Item Number and Heading in Prospectus 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus Outside Front Cover Page; Cross Reference Sheet 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page; Available Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges Prospectus Summary; The Company; Investment Considerations; Selected Financial Data 4. Use of Proceeds Prospectus Summary; Use of Proceeds 5. Determination of Offering Price Underwriting 6. Dilution Not Applicable 7. Selling Security Holders Principal and Selling Shareholders 8. Plan of Distribution Outside Front Cover Page; Underwriting 9. Description of Securities to Be Registered Outside Front Cover Page; Prospectus Summary; Description of Capital Stock 10. Interests of Named Experts and Counsel Management; Legal Matters 11. Information with Respect to the Registrant Outside Front Cover Page; Prospectus Summary; The Company; Common Stock Market Information; Dividend Policy; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Description of Capital Stock; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Not Applicable
EXPLANATORY NOTE The Registrant's name is currently Hardinge Brothers, Inc. The Registrant currently anticipates, however, that its name will be changed to Hardinge Inc. on May 17, 1995 and prior to the effective date of the Registration Statement. To avoid confusion, the Preliminary Prospectus contained in the Registration Statement uses the name Hardinge Inc. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MAY 11, 1995 2,282,000 Shares HARDINGE LOGO Common Stock ($.01 par value) Of the 2,282,000 shares of Common Stock offered hereby, 2,250,000 shares are being sold by Hardinge Inc. and 32,000 shares are being sold by the Selling Shareholder. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. See "Principal and Selling Shareholders." It is anticipated that the initial public offering price will be between $18.00 and $20.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq Stock Market's National Market under the symbol "HDNG." See "Common Stock Market Information." For information concerning certain factors relating to this offering, see "Investment Considerations." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions (1) Company (2) Shareholders Per Share $ $ $ $ Total (3) $ $ $ $
(1) See "Underwriting" for indemnification arrangements. (2) Before deducting estimated expenses of $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 342,300 shares of Common Stock at the Price to Public, less the Underwriting Discounts and Commissions shown above, solely to cover over-allotments, if any. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock offered hereby are being offered by the Underwriters named herein, subject to prior sale and acceptance by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that the Common Stock will be available for delivery on or about June , 1995 at the offices of Wertheim Schroder & Co. Incorporated, New York, New York. WERTHEIM SCHRODER & CO. PRUDENTIAL SECURITIES INCORPORATED Incorporated May , 1995 PHOTOS FOR INSIDE FRONT COVER INSIDE-RIGHT HAND PAGE OF FOLD-OUT TO S-2/A UPPER ONE-THIRD OF PAGE AERIAL VIEW OF HARDINGE'S MANUFACTURING FACILITY Hardinge Worldwide Headquarters, Elmira, New York LEFT-HAND CENTER ASSEMBLY LINE FOR T42 LATHES The CONQUEST(R) T42 Lathe assembly line. BOTTOM RIGHT-HAND CORNER VARIOUS PARTS MACHINED ON HARDINGE MACHINE TOOLS Parts for many industries produced on Hardinge machine tools. PHOTOS FOR INSIDE FRONT COVER INSIDE LEFT-HAND PAGE OF FOLD-OUT TO S-2/A UPPER CENTER HORIZONTAL CNC LATHE CONQUEST(R) T42SP SUPER-PRECISION(R) Lathe LEFT-HAND CENTER VERTICAL CNC MACHINING CENTER CONQUEST(R) VMC 700 Vertical Machining Center MIDDLE CENTER COLLAGE OF HARDINGE SUPER-PRECISION(R) LOGO, THE ASSOCIATION FOR MANUFACTURING TECHNOLOGY LOGO AND THE FLAG OF THE UNITED STATES OF AMERICA Made in USA RIGHT-HAND CENTER HORIZONTAL CNC LATHE CONQUEST(R) VT200 Vertical Lathe BOTTOM LEFT-HAND CORNER VARIOUS COLLETS AND WORKHOLDING DEVICES Collets and workholding devices BOTTOM RIGHT-HAND CORNER CONQUEST(R) GT SUPER-PRECISION(R) Lathe No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offering made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, the Selling Shareholders or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any security other than the securities covered by this Prospectus, nor does it constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such an offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the dates as of which information is furnished or the date hereof. TABLE OF CONTENTS Page Prospectus Summary 3 Investment Considerations 6 The Company 9 Common Stock Market Information 9 Dividend Policy 10 Use of Proceeds 10 Capitalization 11 Selected Financial Data 12 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Business 21 Management 31 Principal and Selling Shareholders 35 Description of Capital Stock 37 Underwriting 40 Legal Matters 41 Experts 41 Available Information 41 Incorporation of Certain Documents by Reference 41 Index to Consolidated Financial Statements F-1 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER- THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company owns or otherwise has rights to trademarks and trade names that it uses in conjunction with the sale of its products. The following trademarks mentioned in this Prospectus are owned by the Company: HARDINGE(R), SUPER PRECISION(R), CONQUEST(R) and HARCRETE(R). PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in connection with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. All of the information in this Prospectus with regard to shares and per share amounts pertaining to the Company's Common Stock has been adjusted to give effect to the conversion of the Company's Class A Common Stock and Class B Common Stock into Common Stock effective immediately prior to the date hereof. As of April 10, 1995, after giving effect to this conversion, the Company would have had 3,859,751 shares of Common Stock outstanding. Unless otherwise indicated, this Prospectus assumes that the Underwriters' over-allotment option is not exercised. For a discussion of certain matters that should be considered by prospective investors, see "Investment Considerations." THE COMPANY Hardinge Inc., founded over 100 years ago, is a leading machine tool manufacturer, which designs, manufactures and distributes metal cutting lathes and related tooling and accessories of the highest precision and reliability generally available in the market. A lathe, or turning machine, is one of the most commonly used machine tools and produces a part or finished product, usually round, by moving a cutting tool against a metal bar or other workpiece that is rotating at a very high speed in a spindle mechanism. The Company offers a broad line of general and higher precision small and medium power computer numerically controlled ("CNC") lathes, a vertical CNC machining center, higher precision manually controlled lathes and a wide assortment of workholding and toolholding devices and other non-machine products and services. The Company currently manufactures 18 machine tool models, including 12 horizontal CNC lathes, two vertical CNC lathes, a vertical CNC machining center and three manual lathes. The Company markets its machine tools under the well-known Hardinge and Hardinge Super Precision names directly to manufacturers in the automotive, medical equipment, aerospace and electronics industries, as well as in the defense, recreational equipment, farm equipment, construction equipment, energy and transportation industries, and to independent job shops serving these and other industries. The Company also offers option packages with each of its machines to meet specific customer requirements and turnkey services through which it will engineer complete CNC machine systems for customers. The Company's large base of installed equipment, coupled with the extensive tooling required to operate a lathe at close tolerances and the need to periodically replace worn-out tooling, have provided a source of significant demand for the Company's non-machine products and services. Non-machine products include over 30,000 different collets, chucks, feed fingers, pads and other workholding devices for its own machines and those produced by other manufacturers, as well as toolholding devices and accessories for its own machines. As part of its commitment to customer service, the Company offers over 45,000 replacement parts, representing substantially all of the spare parts required for the Company's machines currently in service, and such services as equipment installation, operation and maintenance training, machine maintenance and in-field repair. The Company's non-machine products and services have typically provided higher margins than its machine products and, for each of the past five years, have accounted for between 44% and 50% of its net sales. The Company seeks to design machines capable of consistently and cost-effectively producing very high precision parts. The Company has incorporated a number of technological advances in its machines, including the use of its proprietary Harcrete machine bases and a patented real-time thermal compensation system. The Company believes that Harcrete machine bases, which are made of a polymer composite, offer technological advantages over traditional cast iron bases, including better vibration dampening and increased thermal stability, thereby increasing precision levels and tooling life. Higher precision is also achieved through the Company's real-time thermal compensation system, which automatically adjusts the location of a machine's cutting tool to compensate for thermal expansion during the machining process. In response to customer requirements, the Company has reduced its product development cycle in recent years and has regularly upgraded its machines and introduced new machine tools to broaden its line. As a result, in 1994 and the first quarter of 1995, over 45% of the Company's net sales of machine tools were derived from products introduced or substantially modified since the beginning of 1993. Most recently, in late 1994, the Company introduced its first vertical CNC lathes and vertical CNC machining center, marking its entry into two metal cutting markets with combined U.S. sales of over $575,000,000 in 1994. Although it operates in a highly cyclical industry, the Company has been profitable for over 50 years, except for a loss recorded in 1992 resulting from its implementation of Statement of Financial Accounting Standards ("SFAS") No. 106. Factors that have contributed to the Company's profitability in recent years include its significant sales of non-machine products and services, its regular introduction of new and upgraded machine models, its ability to control costs and its high degree of vertical integration. The Company's operating strategy is to further increase sales through the expansion of existing product offerings and the development of new product lines. It will seek this growth through a combination of internal development, licensing arrangements with other producers and acquisitions. The Company also intends to continue to focus on its non-machine products and services, which have been less cyclical than its machines sales and have increased the stability of its operating results. Further, the Company will continue its commitment to Total Quality Management ("TQM"), which the Company believes has helped it to decrease waste, improve manufacturing efficiency, increase product reliability, better control costs and meet customer requirements. PLANT EXPANSION As a result of the Company's launch of 14 new machine tool models since 1991 and the recent upturn in the machine tool market, the Company's Elmira, New York manufacturing facility is currently operating near full capacity, and the Company expects this facility will continue to operate near full capacity for the balance of 1995. In April 1995, the Company began construction of three additions to its manufacturing facility, which, when completed, will increase its machine making capacity by approximately 25%. Construction is expected to be completed by early 1996. The Company estimates that the cost of these additions, together with the necessary machinery and equipment, will be $15,000,000, all or most of which will be funded with a portion of the proceeds of this offering. THE OFFERING
Common Stock offered by: The Company 2,250,000 shares The Selling Shareholder 32,000 shares Common Stock to be outstanding after this offering 6,109,751 shares (1) To repay indebtedness and to expand plant Use of proceeds capacity. Dividend policy The Company currently intends to pay regular quarterly cash dividends on its Common Stock at the annual rate of $.60 per share. See "Dividend Policy." Nasdaq National Market symbol HDNG
(1) Does not include 14,250 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and 128,000 shares of Common Stock reserved for issuance under the Company's 1993 Incentive Stock Plan. See "Management--Incentive Stock Plan." SUMMARY CONSOLIDATED FINANCIAL INFORMATION
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1990 1991 1992 1993 1994 1994 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) Statements of Income Data: Net sales $102,859 $82,595 $ 84,797 $98,437 $117,336 $27,479 $40,687 Gross profit 35,686 28,893 28,892 35,268 40,399 9,549 13,913 Income from operations 7,052 2,914 2,942 9,464 12,517 2,977 5,498 Interest expense 1,309 1,332 1,380 1,343 1,479 371 476 Interest (income) (1,494) (1,590) (1,160) (763) (453) (134) (121) Income before income taxes 7,237 3,770 2,722 8,884 11,933 2,740 5,469 Cumulative effect of changes in accounting methods (1) -- -- (2,754) -- -- -- -- Net income (loss) 4,632 2,707 (1,184) 5,154 6,719 1,612 3,304 Per Share Data: Income before cumulative effect of changes in accounting methods $1.28 $.77 $.45 $1.45 $1.88 $.45 $.92 Cumulative effect of changes in accounting methods (1) -- -- (.79) -- -- -- -- Net income (loss) $1.28 $.77 $(.34) $1.45 $1.88 $.45 $.92 Pro forma net income (2) -- -- -- -- $1.28 $.31 $.61 Cash dividends declared per share $.82 $.80 $.74 $.79 $.84 $.15 $.15 Weighted average number of shares of Common Stock outstanding (3) 3,621 3,535 3,513 3,565 3,573 3,545 3,584 Other Financial Data: Gross margin (4) 34.7% 35.0% 34.1% 35.8% 34.4% 34.8% 34.2% Operating margin (5) 6.9% 3.5% 3.5% 9.6% 10.7% 10.8% 13.5% Capital expenditures $4,563 $6,128 $4,429 $3,873 $8,046 $749 $1,141 Research and development expenditures 4,449 4,786 4,420 4,216 5,218 1,200 1,233 Depreciation and amortization 3,920 4,054 3,801 3,939 4,354 1,305 1,349
MARCH 31, 1995 ACTUAL AS ADJUSTED (6) (IN THOUSANDS, EXCEPT PER SHARE DATA) Balance Sheet Data: Working capital $ 68,544 $ 73,192 Long-term portion of notes receivable 8,899 8,899 Total assets 132,491 148,639 Short-term debt 4,214 714 Long-term debt 21,245 2,143 Shareholders' equity 82,595 121,345 Book value per share (7) 21.40 19.86 Ratio of total debt to total capitalization plus short-term debt 23.6% 2.3%
(1) Includes the cumulative effect of changes in accounting principles for the year ended December 31, 1992 representing the adoption, as of January 1, 1992, of (a) SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," resulting in a $2,867,000 decrease in net income (net of income tax benefit of $1,683,000), and (b) SFAS No. 109, "Accounting for Income Taxes," resulting in a $113,000 increase in net income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations ('Management's Discussion and Analysis')--Accounting Changes." (2) Gives effect to the (i) reduction in interest expense resulting from the application of the estimated net proceeds to the Company from this offering to reduce long- and short-term debt (see "Use of Proceeds") and (ii) recording of income tax expense based on the estimated effective income tax rate, assuming this offering had been consummated on January 1, 1994. Does not give effect to the Company's increased machine making capacity that will result from the expansion of its Elmira, New York manufacturing facility. See "Business--Property." Weighted average number of shares of Common Stock outstanding for the year ended December 31, 1994 and the three months ended March 31, 1994 and 1995 would have been 5,823,000, 5,795,000 and 5,834,000, respectively, assuming this offering had been consummated on January 1, 1994. (3) Excludes shares of restricted Common Stock that had not yet vested, issued to officers and employees under the Company's 1988 and 1993 Incentive Stock Plans. (4) Gross margin is gross profit as a percent of net sales. (5) Operating margin is income from operations as a percent of net sales. (6) Gives effect to the sale by the Company of its shares of Common Stock in this offering (at an assumed offering price of $19.00 per share) and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." (7) Based on 3,859,751 shares of Common Stock outstanding at March 31, 1995 (including 293,581 shares of restricted Common Stock that have not yet vested) and 6,109,751 shares of Common Stock outstanding as adjusted. INVESTMENT CONSIDERATIONS Potential purchasers of the Common Stock should carefully consider the following factors, as well as the other information contained in this Prospectus, before deciding to purchase shares of the Common Stock offered hereby: CYCLICAL INDUSTRY Machine tools are purchased predominately by industrial companies or by independent job shops that, in turn, sell machined parts to industrial companies. As a result, machine tool producers are subject to the long-term cyclical nature of the industrial sector in the United States and in important markets abroad. The level of demand for machine tools can also be affected by factors influencing industrial production, such as interest rates, the availability of skilled laborers and governmental tax policies (such as investment tax credits or accelerated depreciation of capital goods), as well as by the need for manufacturers to improve their efficiency (independent of their need to increase their capacity). Generally, when industrial production has increased, the Company has benefited from increased demand for its products. On the other hand, during periods of economic contraction, the Company has generally been adversely affected by declining demand for its products. The Company's results are expected to continue to be significantly affected by changes in the level of industrial production in its primary markets. See "Business--Machine Tool Industry Overview." DEPENDENCE ON FOREIGN ELECTRONICS SUPPLIER The computer and related electronics package used in the Company's CNC machines are supplied by Fanuc Limited, a large Japanese electronics company. The Company's purchases from this supplier are not made pursuant to a long- term contract and are subject to the additional risks associated with purchasing products internationally, including risks associated with potential import restrictions and exchange rate fluctuations, as well as changes in tax laws, import/export regulations, tariffs and freight rates. Although the Company believes its relationship with this supplier is excellent, there can be no assurance that the Company will be able to obtain these products from this supplier on satisfactory terms indefinitely. While the Company believes that design changes could be made to its machines to allow sourcing from several other suppliers, a disruption in the supply of the Fanuc components could cause the Company to experience a substantial disruption of its operations, depending on the circumstances at the time. Any prolonged disruption in the supply of computer and related electronics packages would materially adversely affect the Company. See "Business--Manufacturing and Supply." COMPETITION The markets in which the Company's machine and non-machine products are sold are extremely competitive and highly fragmented. In marketing its products, the Company competes with other manufacturers primarily on quality, reliability, price, value, delivery time, service and technological characteristics. The Company competes with a number of U.S., European and Asian competitors, many of which are larger, and have substantially greater financial resources, than the Company. While the Company believes its product lines compete effectively in their markets, there can be no assurance that they will continue to do so. See "Business--Competition." TECHNOLOGICAL CHANGE The machine tool industry is subject to technological change, evolving industry standards, changing customer requirements and improvements in and expansion of product offerings, especially with respect to CNC products. The Company's ability to anticipate changes in technology, industry standards, customer requirements and product offerings by competitors, and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, will be significant factors in the Company's competitive position and prospects for growth. Moreover, if technologies or standards used in the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business would be materially adversely affected. Although the Company believes that it has the technological capabilities to remain competitive, there can be no assurance that developments by others will not render the Company's products or technologies obsolete or noncompetitive. Failure to effectively introduce new products or product enhancements on a timely basis could materially adversely affect the Company's business, operating results and financial condition. See "Business--Company Strategy." INTERNATIONAL OPERATIONS In 1994, 21.6% of the Company's net sales were outside of the United States, principally in the United Kingdom, Canada and China. The Company's Western European operations generated operating losses in recent years primarily as a result of a general economic downturn, losses incurred in connection with discounts resulting from a competitive market, and write-offs of discontinued products and obsolete inventory, particularly in France. The Company's international operations have generated lower operating margins than its U.S. operations. See Note 5 to the Consolidated Financial Statements. While the Company has taken several actions to improve the operating results of its Western European operations, there can be no assurance that these actions will be successful. The Company expects that its international operations will continue to realize lower operating margins than its U.S. operations, primarily because of the higher distribution costs incurred on foreign sales and competitive conditions in a number of foreign markets that it serves. See "Management's Discussion and Analysis." The Company expects that international sales will continue to account for a significant portion of its net sales in future periods. International sales are subject to fluctuations in exchange rates and, particularly in emerging economies, are subject to inherent risks, including potential political instability, regional conflicts, unexpected changes in regulatory requirements and tariffs, longer payment cycles, greater difficulty in receivables collection, potentially adverse tax consequences and trade or currency restrictions. These factors could have a material adverse effect on the Company's international operations. See "Management's Discussion and Analysis." FOREIGN EXCHANGE RISK The Company's international operations generate sales in a number of foreign currencies, particularly English pounds sterling, Canadian dollars and Deutsche marks, and it conducts sales and service operations in the United Kingdom, Canada and Germany. Therefore, the Company's results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. dollar. See Notes 1 and 5 to the Consolidated Financial Statements. In addition, the Company's purchases of computers and electronics packages from a supplier in Japan in transactions denominated in Japanese yen are affected by fluctuations in the exchange rate between the Japanese yen and the U.S. dollar. Any prolonged devaluation of the U.S dollar against the Japanese yen could materially increase the cost of the computers and related electronics packages used in the Company's CNC machines. See "Management's Discussion and Analysis." DEPENDENCE ON SKILLED LABOR The Company conducts substantially all of its operations at its factory in Elmira, New York. The Company's continued success depends on its ability to attract and retain a skilled labor force at this location. While the Company has had little difficulty in attracting and retaining skilled employees in the past, there can be no assurance that the Company will continue to be successful in attracting and retaining the personnel it requires to develop, manufacture and market its products and expand its operations. See "Business--Employees." CAPACITY CONSTRAINTS The Company's Elmira, New York manufacturing facility is currently operating near full capacity, and the Company expects this facility to operate near full capacity for the balance of 1995. In April 1995, the Company began construction of three additions to its manufacturing facility, which, when completed, will increase its machine making capacity by approximately 25%. Construction is expected to be completed by early 1996. There can be no assurance that the Company will be able to complete its plant expansion on a timely basis or that production will commence on schedule during early 1996. Any delay in expansion of this facility will likely require the Company to stretch out delivery times or turn down business, which could adversely affect the Company's results of operations and growth. See "Business--Manufacturing and Supply." FLUCTUATIONS IN QUARTERLY RESULTS The Company's quarterly results are subject to significant fluctuation based on the timing of its shipments of machine tools, which are largely dependent upon customer delivery requirements. Traditionally, the Company has experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at its customers' plants and the Company's policy of closing its facilities during the first two weeks of July. As a result, the Company's third-quarter net sales, income from operations and net income typically have been the lowest of any quarter during the year. See "Management's Discussion and Analysis--General" and Note 7 to the Consolidated Financial Statements for information with respect to the Company's quarterly results. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive federal and state legislation and regulation relating to environmental matters. Company activities on its properties have resulted in environmental impacts and activities by others on adjacent properties have had environmental impacts on the Company's properties. Financial responsibility for the remediation of contaminated property can be imposed on the Company regardless of fault or the lawfulness of the original activity or disposal. Although the Company believes, based upon information currently available, that it will not have material liabilities in this regard, there can be no assurance that future remedial requirements or changes in the enforcement of existing laws and regulations, which are often subject to extensive regulatory dis- cretion, will not result in material liabilities. In addition, future environmental regulations, including those under the Clean Air Act, are expected to impose stricter compliance requirements on the machine tool industry in general. While the Company does not believe that these anticipated future requirements are likely to have a material adverse effect upon the Company, there can be no assurance that future capital expenditures and costs for environmental compliance will not have a material adverse effect on the Company's financial condition, results of operations or competitive position. See "Management's Discussion and Analysis--Environmental Expenditures" and "Business--Environmental Matters." CONTROL BY CURRENT SHAREHOLDERS Upon completion of this offering, the Company's existing executive officers, directors and 5% shareholders will beneficially own approximately 34.9% of the Company's outstanding shares of Common Stock. As a result, these shareholders will have a significant influence over, and may in fact control, matters requiring approval by the shareholders of the Company, including the election of directors. The voting power of these shareholders under certain circumstances may have the effect of delaying or preventing a change in control of the Company. See "Management" and "Principal and Selling Shareholders." LIMITED PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, the Company's capital stock consisted of Class A Common Stock and Class B Common Stock, which were quoted through the National Quotation Bureau "pink sheet" service and the OTC Bulletin Board and traded in small amounts on a limited and sporadic basis. See "Common Stock Market Information." Although the Company has applied for the quotation of the Common Stock on the Nasdaq National Market, there can be no assurance that an active trading market for the Common Stock will develop or, if it does develop, that such trading market will be sustained after the completion of this offering. The initial public offering price will be determined by negotiations among the Company, the Selling Shareholders and representatives of the Underwriters, and may not be indicative of prices that will prevail in the trading market. See "Underwriting" for information relating to the factors considered in determining the initial public offering price of the Common Stock. The market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In addition, general market price declines or market volatility in the future could affect the market price of the Common Stock. SHARES AVAILABLE FOR FUTURE SALE At April 10, 1995, the Company had 3,859,751 shares of Common Stock outstanding and an additional 2,250,000 shares (or 2,592,300 shares if the Underwriters' over-allotment option is exercised in full) will be sold by the Company in this offering. Substantially all of these shares that are held by persons other than "affiliates" of the Company will be freely transferable without further restriction under the Securities Act of 1933. The Company, as well as holders of 3,234,432 shares of Common Stock, including the Selling Shareholder and all officers and directors of the Company, have agreed not to offer, sell or otherwise dispose of any shares of Common Stock, subject to certain exceptions, for a period of 180 days following the date of the Prospectus, without the prior written consent of Wertheim Schroder & Co. Incorporated. Prior to this offering, the Company believes that the limited nature of the public trading market for the Common Stock may have caused certain holders of the Common Stock to refrain from disposing of all or a portion of their shares. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Restated Certificate of Incorporation and By-laws may have the effect of discouraging a third party from making an acquisition proposal for the Company and may thereby inhibit a change in control of the Company under circumstances that could give the shareholders the opportunity to realize a premium over the then-prevailing market prices. In addition, under certain circumstances, Section 912 of the New York Business Corporation Law makes it more difficult for an offeror to acquire and exercise control over a corporation pursuant to a tender offer or request or invitation for tenders. See "Description of Capital Stock--Certain Anti-takeover Provisions." THE COMPANY The Company, founded over 100 years ago, is a leading machine tool manufacturer, which designs, manufactures and distributes metal cutting lathes and related tooling and accessories of the highest precision and reliability generally available in the market. A lathe, or turning machine, is one of the most commonly used machine tools and produces a part or finished product, usually round, by moving a cutting tool against a metal bar or other workpiece that is rotating at a very high speed in a spindle mechanism. The Company offers a broad line of general and higher precision small and medium power CNC lathes, a vertical CNC machining center, higher precision manually controlled lathes and a wide assortment of workholding and toolholding devices and other non-machine products and services. The Company currently manufactures 18 machine tool models, including 12 horizontal CNC lathes, two vertical CNC lathes, a vertical CNC machining center and three manual lathes. The Company markets its machine tools under the well-known Hardinge and Hardinge Super Precision names directly to manufacturers in the automotive, medical equipment, aerospace and electronics industries, as well as in the defense, recreational equipment, farm equipment, construction equipment, energy and transportation industries, and to independent job shops serving these and other industries. The Company also offers option packages with each of its machines to meet specific customer requirements and turnkey services through which it will engineer complete CNC machine systems for customers. The Company's large base of installed equipment, coupled with the extensive tooling required to operate a lathe at close tolerances and the need to periodically replace worn-out tooling, have provided a source of significant demand for the Company's non-machine products and services. Non-machine products include over 30,000 different collets, chucks, feed fingers, pads and other workholding devices for its own machines and those produced by other manufacturers, as well as toolholding devices and accessories for its own machines. As part of its commitment to customer service, the Company offers over 45,000 replacement parts, representing substantially all of the spare parts required for the Company's machines currently in service, and such services as equipment installation, operation and maintenance training, machine maintenance and in-field repair. The Company's non-machine products and services have typically provided higher margins than its machine products and, for each of the past five years, have accounted for between 44% and 50% of its net sales. The Company's business was founded by Franklin and Henry Hardinge in 1890 in Chicago, Illinois to produce high quality lathes that were used by local watch manufacturers. In 1931, the Company was merged with Morrison Machine Products, Inc., an Elmira, New York-based maker of workholding devices for lathes that had been organized during World War I. The businesses were combined under the name Hardinge Brothers, Inc. and their operations were consolidated in Elmira under the leadership of Douglas G. Anderson and Leigh R. Evans. On May 16, 1995, it is expected that the Company's name will be changed to Hardinge Inc. Unless the context otherwise requires, the term "Company" refers to Hardinge Inc., a New York corporation, its subsidiaries and predecessors. The principal executive offices of the Company are located at One Hardinge Drive, Elmira, New York 14902-1507 and its telephone number is (607) 734-2281. COMMON STOCK MARKET INFORMATION Prior to this offering, the Company's Class A Common Stock and Class B Common Stock were quoted through the National Quotation Bureau "pink sheet" service and the OTC Bulletin Board under the symbols "HDNGA" and "HDNGB," respectively, and traded in small amounts on a limited and sporadic basis. The Company believes that the prior sales prices and quotations for the Class A and Class B Common Stock do not provide a meaningful indication of the value of the Common Stock. Prior to the initial filing of this offering, such sales prices and quotations were below the anticipated price range for this offering. The initial public offering price of the Common Stock offered hereby will be determined through negotiations among the Company, the Selling Shareholder and the representatives of the Underwriters and may not be indicative of the market price of the Common Stock after this offering. See "Underwriting." Application has been made to have the Common Stock quoted on the Nasdaq Stock Market's National Market ("Nasdaq Stock Market") under the symbol "HDNG" following completion of this offering. At April 10, 1995, there were 432 record holders of the Company's Common Stock. DIVIDEND POLICY The Company has paid regular cash dividends for over 50 consecutive years. The Board of Directors' practice has been to pay five dividends in respect of each year--four quarterly dividends during the year and a fifth dividend in January of the following year. The Board has determined to discontinue the payment of a fifth dividend upon completion of this offering. The Company paid total dividends (including the fifth dividend for the prior year) of $.74 per share in 1993, $.79 per share in 1994 and $.39 per share during the first quarter of 1995. The Company has declared a dividend of $.15 per share payable on June 9, 1995 to shareholders of record on June 2, 1995. Investors in this offering will not receive the June 1995 dividend. The Company has also declared a dividend of $.15 per share payable on September 8, 1995 to shareholders of record on August 25, 1995. The Board of Directors currently intends to pay quarterly dividends at the annual rate of $.60 per share. There can be no assurance, however, as to the payment or amount of future dividends, since they will depend on the Company's earnings and financial condition, upon the prospects for its business and upon other factors the Board of Directors may deem relevant. The payment of dividends will also be subject to compliance with the provisions of New York law and with the financial covenants contained in the Company's debt agreements. Although the Company's existing debt agreements limit the payment of dividends, after giving effect to this offering, these agreements would not currently limit the Company's payment of dividends to a material extent. See "Management's Discussion and Analysis--Liquidity and Capital Resources." USE OF PROCEEDS The net proceeds from the sale of shares of Common Stock by the Company, at an assumed initial public offering price of $19.00 per share, are estimated to be $38,750,000 (or $44,800,000 if the Underwriters' over-allotment option is exercised in full). The net proceeds will be used as follows: (i) To repay all of the borrowings outstanding under the Company's revolving credit facility, which totaled $14,102,000 at March 31, 1995. The revolving credit facility bore interest at the rate of 7.124% per annum on March 31, 1995 and provides for borrowings through August 1, 1997. The revolving credit facility is required to be repaid beginning September 30, 1997 in 16 consecutive quarterly installments of equal amounts. (ii) To repay in full the $5,000,000 principal amount of its 9.52% Term Loan due 1995. In connection with the repayment of its Term Loan, the Company will pay approximately $75,000 in prepayment premiums. (iii) To repay in full the $3,500,000 of borrowings outstanding under the line of credit that matures on April 30, 1996. These borrowings bore interest at the rate of 6.125% per annum on March 31, 1995. (iv) To finance the planned expansion of the Company's manufacturing facility, which is scheduled to be completed by early 1996 and is estimated to cost $15,000,000. In the event that the net proceeds of this offering are not sufficient to cover the full cost of the expansion project, the Company intends to use cash flow from operations or borrowings under its revolving credit facility to fund the balance. See "Business--Property." Pending the uses outlined above, the net proceeds will be invested in short-term, interest-bearing instruments. The Company will not receive any of the proceeds from the sale of the Common Stock offered by the Selling Shareholder. CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1995 and as adjusted to give effect to the sale by the Company of its shares of Common Stock in this offering and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds."
March 31, 1995 Actual As Adjusted (in thousands) Short-term debt (1): Notes payable to bank $ 3,500 $ -- Current portion of long-term debt 714 714 Total short-term debt $ 4,214 $ 714 Long-term debt, less current maturities (1): 9.38% Amortizing Note due 1998 $ 2,143 $ 2,143 9.52% Term Loan due 1995 5,000 -- Revolving Credit Facility 14,102 -- Total long-term debt 21,245 2,143 Shareholders' equity: Preferred Stock, par value $.01 per share: 2,000,000 shares authorized; none issued -- -- Common Stock, par value $.01 per share: 20,000,000 shares authorized; 3,918,790 shares issued; 6,168,790 shares issued, as adjusted (2) 39 62 Additional paid-in capital 11,439 50,166 Retained earnings 77,633 77,633 Cost of treasury shares (740) (740) Cumulative foreign currency translation adjustment (1,739) (1,739) Deferred employee benefits (4,037) (4,037) Total shareholders' equity 82,595 121,345 Total capitalization $103,840 $123,488
(1) See Note 2 to the Consolidated Financial Statements for information concerning the Company's outstanding debt. (2) Includes 59,039 shares of Common Stock held in the Company's treasury and 293,581 shares of Common Stock that have been issued under the Company's 1988 and 1993 Incentive Stock Plans, but which have not yet vested. Does not include 14,250 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and 128,000 shares of Common Stock reserved for issuance under the Company's 1993 Incentive Stock Plan. See "Management--Incentive Stock Plan" and Note 6 to the Consolidated Financial Statements. SELECTED FINANCIAL DATA The following selected financial data (except pro forma data) of the Company with respect to each of the years in the five-year period ended December 31, 1994 are derived from the Consolidated Financial Statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The Consolidated Financial Statements of the Company for each of the three years in the period ended December 31, 1994 appear elsewhere in this Prospectus. The selected financial data of the Company for the three months ended March 31, 1994 and March 31, 1995 are derived from unaudited interim consolidated financial statements of the Company, and reflect, in management's opinion, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for these periods. Results of operations for interim periods are not necessarily indicative of results expected for the full year. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included elsewhere in this Prospectus.
Three Months Year Ended December 31, Ended March 31, 1990 1991 1992 1993 1994 1994 1995 (in thousands, except per share data) Statements of Income Data: Net sales $102,859 $ 82,595 $ 84,797 $ 98,437 $117,336 $27,479 $ 40,687 Cost of sales 67,173 53,702 55,905 63,169 76,937 17,930 26,774 Gross profit 35,686 28,893 28,892 35,268 40,399 9,549 13,913 Selling, general and administrative expenses 28,634 25,979 24,864 25,804 27,882 6,572 8,415 Restructuring costs (1) -- -- 1,086 -- -- -- -- Income from operations 7,052 2,914 2,942 9,464 12,517 2,977 5,498 Interest expense 1,309 1,332 1,380 1,343 1,479 371 476 Interest (income) (1,494) (1,590) (1,160) (763) (453) (134) (121) (Gain) on sale of assets -- (598) -- -- (442) -- (326) Income before income taxes 7,237 3,770 2,722 8,884 11,933 2,740 5,469 Income taxes (2) 2,605 1,063 1,152 3,730 5,214 1,128 2,165 Income before cumulative effect of changes in accounting methods 4,632 2,707 1,570 5,154 6,719 1,612 3,304 Cumulative effect of changes in accounting methods (3) -- -- (2,754) -- -- -- -- Net income (loss) $ 4,632 $ 2,707 $ (1,184) $ 5,154 $ 6,719 $ 1,612 $ 3,304 Per Share Data: Income before cumulative effect of changes in accounting methods $ 1.28 $ .77 $ .45 $ 1.45 $ 1.88 $ .45 $ .92 Cumulative effect of changes in accounting methods (3) -- -- (.79) -- -- -- -- Net income (loss) $ 1.28 $ .77 $ (.34) $ 1.45 $ 1.88 $ .45 $ .92 Pro forma net income (4) -- -- -- -- $ 1.28 $ .31 $ .61 Cash dividends declared per share $ .82 $ .80 $ .74 $ .79 $ .84 $ .15 $ .15 Weighted average number of shares of Common Stock outstanding (5) 3,621 3,535 3,513 3,565 3,573 3,545 3,584 Other Financial Data: Gross margin (6) 34.7% 35.0% 34.1% 35.8% 34.4% 34.8 $ 34.2% Operating margin (7) 6.9% 3.5% 3.5% 9.6% 10.7% 10.8 $ 13.5% Capital expenditures $ 4,563 $ 6,128 $ 4,429 $ 3,873 $ 8,046 $ 749 $ 1,141 Research and development expenditures 4,449 4,786 4,420 4,216 5,218 1,200 1,233 Depreciation and amortization 3,920 4,054 3,801 3,939 4,354 1,305 1,349
(Continued on next page.)
December 31, March 31, 1990 1991 1992 1993 1994 1994 1995 (in thousands, except per share data) Balance Sheet Data: Working capital $ 59,621 $57,295 $54,035 $ 58,455 $ 60,520 $ 58,978 $ 68,544 Long-term portion of notes receivable 11,979 7,018 9,536 12,460 7,744 10,694 8,899 Total assets 105,936 98,536 98,461 111,169 121,726 109,456 132,491 Short-term debt 1,277 1,590 1,449 1,390 4,214 955 4,214 Long-term debt 14,000 10,223 11,571 18,357 15,164 15,857 21,245 Shareholders' equity 79,263 78,188 73,067 75,462 79,776 76,620 82,595 Book value per share (8) 21.34 20.97 19.87 19.99 21.05 20.13 21.40 Ratio of total debt to total capitalization plus short-term debt 16.2% 13.1% 15.1% 20.7% 19.5% 18.0% 23.6%
(1) The restructuring charge in 1992 represented nonrecurring costs consisting primarily of severance payments to terminated employees in Canada and the United Kingdom. (2) Income taxes for 1991 were reduced by the effects of eliminating income taxes provided in periods prior to December 31, 1990, which were no longer required. (3) The cumulative effect of changes in accounting principles for the year ended December 31, 1992 represent the adoption, as of January 1, 1992, of (a) SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," resulting in a $2,867,000 decrease in net income (net of income tax benefit of $1,683,000), and (b) SFAS No. 109, "Accounting for Income Taxes," resulting in a $113,000 increase in net income. See "Management's Discussion and Analysis--Accounting Changes." (4) Gives effect to the (i) reduction in interest expense resulting from the application of the estimated net proceeds to the Company from this offering to reduce long- and short-term debt (see "Use of Proceeds") and (ii) recording of income tax expense based on the estimated effective income tax rate, assuming this offering had been consummated on January 1, 1994. Does not give effect to the Company's increased machine making capacity that will result from the expansion of its Elmira, New York manufacturing facility. See "Business--Property." Weighted average number of shares of Common Stock outstanding for the year ended December 31, 1994 and the three months ended March 31, 1994 and 1995 would have been 5,823,000, 5,795,000 and 5,834,000, respectively, assuming this offering had been consummated on January 1, 1994. (5) Excludes shares of restricted Common Stock that had not yet vested, issued to officers and employees under the Company's 1988 and 1993 Incentive Stock Plans. (6) Gross margin is gross profit as a percent of net sales. (7) Operating margin is income from operations as a percent of net sales. (8) Based on 3,714,946 shares of Common Stock outstanding at December 31, 1990, 3,728,558 shares at December 31, 1991, 3,677,884 shares at December 31, 1992, 3,774,543 shares at December 31, 1993, 3,790,057 shares at December 31, 1994, 3,806,802 shares at March 31, 1994 and 3,859,751 shares at March 31, 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes and the other financial information included in this Prospectus. GENERAL The United States is the principal market for the Company's products (78.4% of the Company's net sales for 1994). The U.S. market for machine tools historically has been highly cyclical. During periods of economic expansion, particularly when industrial production has increased, the Company generally has benefitted from increased demand for its products. During periods of economic contraction, the Company generally has been adversely affected by declining demand for its products. However, the Company has been profitable for over 50 years, except for a loss recorded in 1992 resulting from its implementation of SFAS No. 106. Factors that have contributed to the Company's profitability in recent years include its significant sales of non-machine products and services, its regular introduction of new and upgraded machine models, its ability to control costs and its high degree of vertical integration. The Company's Western European operations generated 10.5% of its net sales for 1994. These operations incurred operating losses of $1,281,000, $617,000 and $875,000 for 1992, 1993 and 1994, respectively, primarily as a result of a general economic downturn and losses incurred in connection with discounts resulting from a competitive market and write-offs of discontinued and obsolete inventory, particularly in France. During the first quarter of 1995, the Company's Western European operations generated $314,000 of income from operations, compared to an operating loss of $72,000 during the same period of 1994. The Company changed its distribution channels in France in late 1994 and believes that this action, together with increased net sales primarily in the United Kingdom, contributed to improved operating results in Western Europe. The Company's international operations have generated lower operating margins than its U.S. operations. See Note 5 to the Consolidated Financial Statements. The Company expects that its international operations will continue to realize lower operating margins than its U.S. operations, primarily because of the higher distribution costs incurred on foreign sales and competitive conditions in a number of the foreign markets that it serves. The computer and related electronics package for the Company's CNC machines are supplied by Fanuc Limited, a large Japanese electronics company. The purchase price is denominated in yen and therefore subject to fluctuation. The Company has, from time to time, engaged in hedging transactions between the Japanese yen and the U.S. dollar solely for the purpose of reducing its exposure on its yen-denominated purchases of components from Fanuc and other Japanese suppliers. At March 31, 1995, the Company's exposure on hedging transactions was not material. While the Company believes that its exposure to the yen/dollar exchange rate is offset to a degree by the fact that its Japanese competitors import finished machines into the United States from Japan (or import a substantially larger proportion of their components from Japan), any prolonged devaluation of the U.S. dollar against the Japanese yen could materially increase the cost of the computers and related electronics packages used in the Company's CNC machines. RESULTS OF OPERATIONS The following table sets forth the items in the Company's consolidated statements of income as percentages of its net sales for the periods indicated:
Three Months Year Ended December 31, Ended March 31, 1992 1993 1994 1994 1995 Net sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 65.9 64.2 65.6 65.2 65.8 Gross profit 34.1 35.8 34.4 34.8 34.2 Selling, general and administrative expenses 29.3 26.2 23.8 24.0 20.7 Restructuring costs 1.3 -- -- -- -- Income from operations 3.5 9.6 10.6 10.8 13.5 Interest expense 1.6 1.4 1.3 1.3 1.2 Interest (income) (1.3) (0.8) (0.4) (0.5) (0.3) Gain on sale of assets -- -- (0.4) -- (0.8) Income before income taxes 3.2 9.0 10.1 10.0 13.4 Income taxes 1.4 3.8 4.4 4.1 5.3 Income before cumulative effects of changes in accounting methods 1.8 5.2 5.7 5.9 8.1 Cumulative effect of changes in accounting methods (3.2) -- -- -- -- Net (loss) income (1.4)% 5.2% 5.7% 5.9% 8.1%
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31, 1994 Net Sales. Net sales increased 48.1% to $40,687,000 in the first quarter of 1995 from $27,479,000 in the same quarter of 1994. Unit volumes increased for most of the Company's machine tool lines, as a result of initial shipments of its vertical CNC lathes and machining center and continued increases in sales of its Conquest T42 CNC lathe line and other horizontal CNC lathes, particularly to the automobile industry. Lathes and other machine tool equipment accounted for $24,584,000 of the Company's net sales in the first quarter of 1995, an increase of 58.6% from $15,496,000 in the same quarter of 1994. Net sales of non-machine products and services increased 34.4% to $16,103,000 in the first quarter of 1995 from $11,983,000 in the same period of 1994. The Company experienced improvements in all of its significant geographical markets. The largest amount of the increase came in the U.S. market, where net sales increased 43.5% to $33,090,000 in the first quarter of 1995 from $23,065,000 in the same period of 1994. Net sales in Western European markets, primarily the United Kingdom, increased 56.0% to $4,369,000 in the first quarter of 1995 from $2,801,000 in the same period of 1994. Net sales in the Company's other foreign markets increased 100.1% to $3,228,000 in the first quarter of 1995 from $1,613,000 in the same quarter of 1994, with the increases primarily occurring in Canada and China. Gross Profit. Gross profit increased 45.7% to $13,913,000 in the first quarter of 1995 from $9,549,000 in the same period of 1994. Gross margin was 34.2% in the first quarter of 1995 compared to 34.8% in the same period of 1994. Gross margin declined slightly as a result of startup costs of the production of its vertical CNC lathes and machining center, and as a result of the higher percentage of net sales in its machine tool equipment lines, which have traditionally provided lower margins than its non-machine products and services. The decrease in gross margin was partially offset by the Company's ability to spread its overhead costs over a larger number of units sold. Because of hedging transactions and a lower level of discounts, the drop in the value of the dollar against the Japanese yen did not have a significant impact on the quarter-to-quarter comparison of gross margin. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased 28.0% to $8,415,000 in the first quarter of 1995 from $6,572,000 in the same period of 1994, primarily as a result of a $600,000 increase in sales commissions resulting from increased net sales and an increase of $410,000 in advertising and trade show expenses in the first quarter of 1995. SG&A decreased as a percent of net sales to 20.7% in the first quarter of 1995 from 24.0% in the same period of 1994, largely as a result of the Company's strategy of controlling SG&A expenses in a period of sales growth. Income from Operations. Income from operations increased 84.6% to $5,498,000 in the first quarter of 1995 from $2,977,000 for the same period of 1994. Income from operations as a percentage of net sales increased to 13.5% in the first quarter of 1995 from 10.8% in the same period of 1994. Interest Expense. Interest expense increased 28.3% to $476,000 in the first quarter of 1995 from $371,000 in the same period of 1994, due to an increase in average interest rates on the Company's outstanding borrowings and an increase in average monthly borrowings between the two periods. Interest Income. Interest income, primarily consisting of interest on customer notes receivable, was $121,000 in the first quarter of 1995 and remained fairly constant from the same period of 1994. Gain on Sale of Assets. Results for the first quarter of 1995 included a gain of $326,000 (approximately $198,000 on an after-tax basis) on the sale of a building in Los Angeles. The Company's sales and demonstration office formerly located there has been relocated to a leased facility. Income Taxes. The provision for income taxes was $2,165,000 in the first quarter of 1995 compared to $1,128,000 in the same period of 1994. The Company's tax rate decreased to 39.6% of pre-tax income in the first quarter of 1995 from 41.2% in the same quarter of 1994. The 1995 tax rate was favorably impacted by profits in the Company's Western European operations for which no tax provision was recorded because of the availability of net operating loss carryforwards. Net Income. Net income increased to $3,304,000 in the first quarter of 1995 from $1,612,000 in the same period of 1994, as a result of the factors discussed above. Geographically, operations in North America showed significant improvements, with net income increasing from $1,654,000 in the first quarter of 1994 to $2,931,000 in the same period of 1995, while operations in Western Europe recovered from a net loss of ($86,000) in the first quarter of 1994 to a net income of $277,000 in the same period of 1995. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Net Sales. Net sales increased 19.2% to $117,336,000 in 1994 from $98,437,000 in 1993. Unit volumes increased in 1994 across the Company's entire line of machine tools and, in particular, in its new Conquest ST Swiss-style CNC lathe introduced in late 1993. The increase in net sales largely was related to improved general economic conditions and increased capital expenditures by the Company's industrial customers. Lathes and other machine tool equipment accounted for $65,829,000 of the Company's net sales in 1994, an increase of 21.7% from $54,112,000 in 1993. Net sales of non-machine products and services increased 16.1% to $51,507,000 in 1994 from $44,325,000 in 1993. Net sales in the United States increased 13.1% to $92,027,000 in 1994 from $81,338,000 in 1993. Net sales in Western Europe increased 41.8% to $12,329,000 in 1994 from $8,696,000 in 1993 with increased sales volumes in the United Kingdom more than offsetting continued depressed net sales in continental Western Europe. Net sales in the Company's other international markets increased 54.5% to $12,980,000 in 1994 from $8,403,000 in 1993, led by improved net sales in Eastern Asia and Canada. Gross Profit. Gross profit increased 14.5% to $40,399,000 in 1994, from $35,268,000 in 1993. This increase in gross profit primarily was a result of increased volume and selective price increases. Gross margin was 34.4% for 1994 compared to 35.8% in 1993. Gross margin declined slightly as a result of price discounting of certain discontinued models of machine tools in Western Europe, a write-off of obsolete inventory in France resulting from changes in the Company's distribution channels, competitive market conditions in Western Europe and the increase in the cost of electronic components due to the relative weakness of the U.S. dollar against the Japanese yen in 1994, compared to 1993. The decrease in gross margin was partially offset by an increase in unit volumes that distributed fixed costs over a greater number of units. Selling, General and Administrative Expenses. SG&A expenses increased 8.1% to $27,882,000 in 1994 from $25,804,000 in 1993 primarily as a result of a $1,400,000 increase in sales commissions resulting from increased net sales and an increase of $500,000 in advertising and trade show expenses in 1994. SG&A expenses decreased as a percentage of net sales to 23.8% in 1994 from 26.2% in 1993, largely as a result of the Company's strategy of controlling SG&A expenses in a period of sales growth. Income from Operations. Income from operations increased 32.3% to $12,517,000 in 1994 from $9,464,000 in 1993. Income from operations as a percentage of net sales increased to 10.6% in 1994 from 9.6% in 1993. Interest Expense. Interest expense increased 10.1% to $1,479,000 in 1994 from $1,343,000 in 1993 due to an increase in average interest rates on the Company's outstanding borrowings from 1993 to 1994. Average monthly borrowing under such facilities remained fairly constant from 1993 to 1994. Interest Income. Interest income, primarily consisting of interest on customer notes receivable, decreased 40.6% to $453,000 in 1994 from $763,000 in 1993, primarily as a result of an increase in sales incentives in the form of reduced interest charges. Income Taxes. The provision for income taxes was $5,214,000 in 1994 compared to $3,730,000 in 1993. The Company's tax rate increased to 43.7% of income in 1994 from 42.0% of income in 1993, primarily as a result of operating losses in Western Europe that the Company was unable to offset against income from prior years and also as a result of a provision for U.S. taxes on a deemed distribution of earnings from a foreign subsidiary. Net Income. Net income increased 30.4% to $6,719,000 in 1994 from $5,154,000 in 1993 as a result of the factors discussed above. Geographically, performance in North American operations showed significant improvements in profitability while Western European operations continued to generate losses despite the substantial sales increase, as overall unit volumes failed to reach levels sufficient to cover operating costs. YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992 Net Sales. Net sales increased 16.1% to $98,437,000 in 1993 from $84,797,000 in 1992. Unit volumes increased for the majority of the Company's product lines led by increases in the Conquest 51 CNC lathe line that was introduced in late 1991 and the Conquest T42 CNC lathe line that was technologically updated at the beginning of 1993. The increase in unit volumes was largely related to improved general economic conditions and increased capital expenditures by the Company's industrial customers. Lathes and other machine tool equipment accounted for $54,112,000 of the Company's net sales in 1993, an increase of 27.2% from $42,537,000 in 1992. Net sales of non-machine products and services increased 4.9% to $44,325,000 in 1993 from $42,260,000 in 1992. Net sales in the United States increased 15.3% to $81,338,000 in 1993 from $70,540,000 in 1992, more than offsetting a decrease in Western European net sales of 7.0% to $8,696,000 in 1993 from $9,354,000 in 1992. Net sales in the Company's other international markets increased 71.4% to $8,403,000 in 1993 from $4,903,000 in 1992, led by improved net sales in Eastern Asia and Canada. Gross Profit. Gross profit increased 22.1% to $35,268,000 in 1993 from $28,892,000 in 1992. Gross profit increased as a result of increased sales volume. Gross margin was 35.8% in 1993 compared to 34.1% in 1992. Gross margin increased as a result of the implementation of cost cutting efforts in the fourth quarter of 1992 that began to generate results in 1993 and the increase in unit sales in 1993 which distributed fixed costs over a greater number of units. These positive impacts were partially offset by an increase in the cost of electronic components due to the relative weakness of the U.S. dollar against the Japanese yen in 1993 compared to 1992, as well as reduced margins in the Company's international sales. Selling, General and Administrative Expenses. SG&A expenses increased 3.8% to $25,804,000 in 1993 from $24,864,000 in 1992, primarily as a result of a $1,300,000 increase in sales commissions related to the increase in net sales which was partially offset by a decrease in administrative expenses in the Company's Western European and Canadian subsidiaries. SG&A expenses decreased as a percentage of net sales to 26.2% in 1993 from 29.3% in 1992 largely as a result of the Company's strategy of controlling SG&A expenses in a period of sales growth. Income from Operations. Income from operations increased to $9,464,000 in 1993 from $2,942,000 in 1992. Income from operations in 1992 was reduced by a $1,086,000 nonrecurring charge ($641,000 after tax) primarily consisting of severance payments to terminated employees in Canada and the United Kingdom. Excluding this nonrecurring charge, income from operations as a percentage of net sales increased to 9.6% in 1993 from 4.8% in 1992. Interest Expense. Interest expense remained relatively unchanged from 1992 to 1993 with average monthly debt outstanding and interest rates remaining substantially unchanged. Interest Income. Interest income decreased 34.2% to $763,000 in 1993 from $1,160,000 in 1992, primarily as a result of an increase in sales incentives in the form of reduced interest charges, as well as the higher level of sales of customer notes to financial institutions in 1993. Income Taxes. The provision for income taxes was $3,730,000 in 1993 compared to $1,152,000 in 1992. Income tax expense, as a percentage of income before taxes, was 42.0% in 1993 and 42.3% 1992. The rate in both years was affected by the inability to record tax benefits against losses in foreign subsidiaries which could not be carried back to prior years. Net Income. Net income increased to $5,154,000 in 1993 from a loss of $1,184,000 in 1992. These amounts reflect two cumulative changes in accounting methods, as discussed below, as well as the nonrecurring charge for the Company's European operations discussed above. Excluding these nonrecurring items, net income increased 133.1% to $5,154,000 in 1993 from $2,211,000 in 1992 as a result of the various factors discussed above. ACCOUNTING CHANGES In December 1990, the Financial Accounting Standards Board issued new rules (SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions") requiring that the projected future cost of providing postretirement benefits such as health care be recognized as expense when employees render services instead of when the benefits are paid. Effective January 1, 1992, the initial liability representing amounts payable to current retirees and amounts earned by active employees to date was recognized as a one-time charge against income as permitted by the provisions of the Statement. Accordingly, the Consolidated Statements of Income and Retained Earnings reflect a cumulative effect of a change in accounting method of $2,867,000, which is net of a deferred tax benefit. The charge did not affect the Company's cash flow, as it is a change in how retiree benefits were accounted for rather than a cost that must be paid out of cash immediately. A more thorough discussion of the components of the liability can be found in Note 6 to the Consolidated Financial Statements. Management also chose to adopt SFAS No. 109, Accounting for Income Taxes, effective January 1, 1992. Under these rules, income taxes are recorded using the liability method instead of the deferral method. The liability method requires companies to recognize deferred income tax assets and liabilities reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The only significant change for the Company was to revalue assets and liabilities that had been recorded at higher rates in the past to the current tax rate. The impact of that revaluation was an increase in net income of $113,000. The application of the Statement allowed for recording a deferred tax asset on the liability created by SFAS 106, but did not have any impact on the income tax expense recorded on normal operations for 1992. INFLATION Foreign competition, particularly from Japanese companies, limits the amount of inflationary cost increases that the Company can recover through price increases. To counteract inflationary pressures, management focuses on improving operating efficiencies and selectively increases prices, where practical. QUARTERLY INFORMATION The following table sets forth certain quarterly financial data included in the Company's unaudited consolidated statements of operations for each of the periods indicated.
Three Months Ended March June Sept. Dec. March June Sept. Dec. March 31, 30, 30, 31, 31, 30, 30, 31, 31, 1993 1993 1993 1993 1994 1994 1994 1994 1995 (in thousands, except per share data) Net sales $24,588 $25,113 $22,511 $26,225 $27,479 $29,023 $29,449 $31,385 $40,687 Gross profit 9,015 8,791 7,939 9,523 9,549 10,010 10,394 10,446 13,913 Income from operations 2,638 2,315 1,633 2,878 2,977 3,358 2,975 3,207 5,498 Net income 1,494 1,259 928 1,473 1,612 1,819 1,608 1,680 3,304 Net income per share .43 .35 .26 .41 .45 .51 .45 .47 .92
The Company's sales generally have not been subject to significant seasonal variation. However, the Company's quarterly results are subject to significant fluctuation based on the timing of its shipments of machine tools, which are largely dependent upon customer delivery requirements. Traditionally, the Company has experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at its customers' plants and the Company's policy of closing its facilities during the first two weeks of July. As a result, the Company's third-quarter net sales, income from operations and net income typically have been the lowest of any quarter during the year. However, certain large shipments in the third quarter of 1994 substantially offset the effects of the two-week July shutdown. The Company experienced a significant increase in orders during the first quarter of 1995. However, the Company currently does not expect an unusually high level of shipments in the second or third quarter of 1995. Accordingly, the Company expects that its net sales, income from operations, net income and net income per share in the second quarter of 1995 will be lower than in the first quarter, although they are expected to compare favorably with the same quarter of 1994. In addition, the Company believes that its results in the third quarter of 1995 may not exceed its results for the same quarter of 1994 because of certain large shipments made in the 1994 quarter, and, as a result of the issuance of additional shares of Common Stock in this offering, net income per share in the 1995 period is expected to be substantially lower than in the comparable 1994 period. LIQUIDITY AND CAPITAL RESOURCES The Company's current ratio at March 31, 1995 was 4.03:1 compared to 5.96:1 at March 31, 1994. At December 31, 1994, the current ratio was 3.92:1 compared to 5.77:1 at December 31, 1993. In the first quarter of 1995, current assets increased by $9,866,000, with an increase of $6,659,000 in accounts receivable, primarily in receivables from customers in the automobile industry. Inventories increased by $3,381,000 reflecting the start-up of production of the Company's new vertical CNC lathes and vertical CNC machining center and higher production levels. Current liabilities increased by $1,842,000 as accounts payable increased with the higher level of inventory purchases. In 1994, inventory increased by $6,408,000 or 14% reflecting increased production levels and purchases for the start-up of production of the Company's new vertical CNC machines. Accounts receivable increased by $4,474,000 due to the increase in net sales. Accounts payable increased by $2,164,000 reflecting the higher inventory purchases. Although notes payable to bank increased $2,824,000 as the Company began to use a short-term line of credit providing lower interest rates than the Company's other sources of borrowing, this increase was more than offset by a $3,193,000 decrease in long-term debt. In the first quarter of 1995, operating activities used $4,471,000 of cash, while operating activities provided $4,798,000 of cash in the same quarter of 1994. Operating activities used cash in the 1995 period, notwithstanding the Company's improved net income, primarily because of the increase in accounts receivable and inventories, as well as an increase in customer notes, which were partially offset by increases in accrued expenses and accounts payable. The Company reduced its sales of customer notes during the first quarter of 1995 compared to the level of sales it completed during 1994. Operating activities provided cash in the first quarter of 1994, primarily because accounts receivable and inventories remained relatively flat, sales of customer notes reduced notes receivable and accrued expenses increased. In its investing and financing activities, the Company requires cash primarily for capital expenditures and dividend payments. In the first quarter of 1995, the Company used its cash flow from operations and additional long-term borrowings under its revolving credit facility to finance the increase in current assets, its capital expenditures program and dividend payments. In the 1994 period, cash provided by operations funded its capital expenditures and dividend payments, as well as a reduction in its long-term and short-term debt. In 1994, operating activities provided net cash of $11,290,000, while operating activities used $241,000 of cash in 1993 and provided $5,448,000 of cash in 1992. Operating activities provided a high level of cash in 1994, notwithstanding the increases in accounts receivable and inventories, primarily because of the Company's substantial sales of long-term customer notes receivable, an increase in accrued expenses and accounts payable and the Company's higher level of net income. Operating activities used cash in 1993, primarily because of increases in inventories and customer notes, as well as increases in accounts receivable and other assets. In 1994, the Company funded its capital expenditures and dividend requirements from the cash provided by its operations, while in 1993 the Company used its cash flow from operations and additional long-term borrowings to finance an increase in the customer notes, its capital expenditures program and dividend payments. As is common in its industry, the Company provides long-term financing for the purchase of its equipment by qualified customers. The Company regards this program as an important part of its marketing efforts, particularly to independent machine shops. Customer financing is offered for a term of up to seven years, with the Company retaining a security interest in the purchased equipment. In response to competitive pressures, the Company occasionally offers this financing at below market interest rates or with deferred payment terms. The present value of the difference between the actual interest charged on customer notes for periods during which finance charges are waived or reduced and the estimated rate at which the notes could be sold to financial institutions is accounted for as a reduction of the Company's net sales. The amount of these charges has not been material. In the event of a customer default and foreclosure, it is the practice of the Company to recondition and resell the equipment. It has been the Company's experience that such equipment resales have realized the approximate remaining contract value. In order to reduce its debt and finance its current operations, the Company has, for many years, periodically sold a substantial portion of its underlying customer notes receivable to various financial institutions. During 1992, 1993 and 1994, customer notes totaling $6,900,000, $19,800,000 and $30,000,000, respectively, were sold. In the first quarter of 1995, the Company sold $3,000,000 of customer notes compared to $9,100,000 sold during the first quarter of the prior year. In these sales of customer notes, recourse against the Company from customer defaults is limited to 10% of the then outstanding balance thereof. The 10% portion of customer notes retained by the Company, as well as all customer notes that have not been sold by the Company, are included in notes receivable in its consolidated balance sheet. See Note 2 to the Consolidated Financial Statements. Although the Company has no formal arrangements with financial institutions to purchase its customer notes receivable, it has not experienced difficulty in arranging such sales. While the Company's customer financing program has an impact on its month- to-month borrowings from time to time, it has had little long-term impact on its working capital because of the sales of the underlying customer notes receivable. The amount of long-term customer notes receivable held by the Company declined from $12,460,000 at December 31, 1993 to $7,744,000 at December 31, 1994, because of the high level of sales of these notes to financial institutions during 1994. The amount of these receivables held by the Company increased to $8,899,000 at March 31, 1995. Capital expenditures amounted to $4,429,000 in 1992, $3,873,000 in 1993 and $8,046,000 in 1994. The majority of these expenditures was concentrated on assets used to improve operating efficiencies in manufacturing and to increase capacity. Capital expenditures rose sharply in 1994 primarily because of several large purchases of equipment for its Elmira, New York manufacturing facility. In April 1995, the Company began construction of three additions to its manufacturing facility, which, when completed, will increase its machine making capacity by approximately 25%. Construction is expected to be completed by early 1996. The Company estimates that the cost of these additions, together with the necessary machinery and equipment, will be $15,000,000, all or most of which will be funded with a portion of the proceeds of this offering. See "Business--Property." The Company expects to spend approximately $12,000,000 of this amount during 1995 and the balance in 1996. The Company currently estimates that other capital expenditures will total $3,000,000 in 1995, $1,141,000 of which was spent during the first quarter of the year. These other capital expenditures will primarily be made to improve operating efficiencies at the Elmira manufacturing facility. The Board of Directors' practice has been to pay five dividends in respect of each year--four quarterly dividends during the year and a fifth "extra" dividend in January of the following year. The Board has determined to discontinue the payment of a fifth dividend upon completion of this offering. The Company paid total dividends of $2,746,000, $2,676,000, $2,864,000 and $1,483,000 during 1992, 1993, 1994 and the first quarter of 1995, respectively. The Board of Directors currently intends to pay quarterly dividends in the future at the annual rate of $.60 per share. Assuming no change in the Company's outstanding Common Stock after April 10, 1995 (other than the sale of shares of Common Stock in this offering), dividends at that rate would require $3,666,000 of cash per year. See "Dividend Policy." The Company entered into a revolving credit facility with three banks in 1994, which provides for the borrowing of up to $30,000,000 on a revolving basis through August 1, 1997, at which time all outstanding borrowings will convert to a term loan payable in 16 equal quarterly installments through 2001. Under the revolving credit agreement, the Company is required to comply with certain financial covenants with respect to the minimum level of current assets over current liabilities, minimum tangible net worth, maximum level of debt and the ratio of total liabilities to tangible net worth. The revolving credit facility and other formal and informal domestic and foreign revolving credit arrangements permitted total borrowings of $35,000,000 at March 31, 1995. At March 31, 1995, outstanding borrowings under these arrangements totaled $17,602,000. Management believes that the currently available credit facilities and internally generated funds, together with the net proceeds to be received by the Company in this offering, will provide sufficient financial resources for ongoing operations for at least the next two years. ENVIRONMENTAL EXPENDITURES The Company has incurred and, in the future, will continue to incur capital and operating expenditures for matters related to environmental issues, including environmental control, monitoring and remediation. During the past three years, the Company's expenditures for environmental matters have not been material. The Company currently anticipates that capital expenditures for environmental control facilities for the remainder of the current fiscal year and for the next two succeeding years will have no material adverse effect upon the Company's financial condition, results of operations or competitive position. The Company also anticipates that there will be no material adverse effect on its financial position from other environmental expenditures, including remediation costs, during these years. The Company has made and will continue to make the necessary capital expenditures for compliance with environmental laws and regulations. Environmental laws and regulations can change rapidly and the Company may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on the Company's financial condition, results of operations or competitive position. See "Business--Environmental Matters." BUSINESS The Company, founded over 100 years ago, is a leading machine tool manufacturer, which designs, manufactures and distributes metal cutting lathes and related tooling and accessories of the highest precision and reliability generally available in the market. A lathe, or turning machine, is one of the most commonly used machine tools and produces a part or finished product, usually round, by moving a cutting tool against a metal bar or other workpiece that is rotating at a very high speed in a spindle mechanism. The Company offers a broad line of general and higher precision small and medium power CNC lathes, a vertical CNC machining center, higher precision manually controlled lathes and a wide assortment of workholding and toolholding devices and other non-machine products and services. The Company currently manufactures 18 machine tool models, including 12 horizontal CNC lathes, two vertical CNC lathes, a vertical CNC machining center and three manual lathes. The Company markets its machine tools under the well-known Hardinge and Hardinge Super Precision names directly to manufacturers in the automotive, medical equipment, aerospace and electronics industries, as well as in the defense, recreational equipment, farm equipment, construction equipment, energy and transportation industries, and to independent job shops serving these and other industries. The Company also offers option packages with each of its machines to meet specific customer requirements, as well as turnkey services through which it will engineer complete CNC machine systems. The Company's non-machine products include over 30,000 different collets, chucks, feed fingers, pads and other workholding devices for its own machines and those produced by other manufacturers, as well as toolholding devices and accessories for its own machines. COMPANY STRATEGY The key elements of the Company's strategy are: * Product Line Expansion. The Company has regularly upgraded its machines and introduced new machine tools to broaden its line. As a result, in 1994 and the first quarter of 1995, over 45% of the Company's net sales of machine tools were derived from products introduced or substantially modified since the beginning of 1993. In late 1994, the Company introduced its first vertical CNC lathes and vertical CNC machining center, marking its entry into two metal cutting markets that had combined U.S. sales of over $575,000,000 in 1994. The Company will seek to continue to expand by broadening its product lines and entering additional metal cutting markets. The Company believes that, as the consolidation of the machine tool industry continues and the technological capacity of machine tools improves, an increasing number of machine tool customers will prefer to deal with manufacturers that can supply a broad range of products. * Non-Machine Products and Services. The Company's large base of installed equipment, coupled with the extensive tooling required to operate a lathe at close tolerances and the need to periodically replace worn-out tooling, have provided a source of significant demand for the Company's non-machine products and services. The Company's non-machine products and services have typically provided higher margins than its machine products and, for each of the past five years, have accounted for between 44% and 50% of its net sales. The Company believes that its extensive line of workholding devices, which may be used on both its machines and those produced by others, give the Company an important competitive advantage for its machine tool sales, by providing it with opportunities to sell its machines and other products to a wide group of customers. * Technology. The Company strives to be an industry leader in the use of the advanced technologies necessary to deliver higher precision machine tools in the markets in which it competes. The Company employs significant resources in the design and engineering of its products as part of its product development program. For example, the Company utilizes its proprietary Harcrete machine bases on all but two of its current horizontal CNC lathes, which bases offer technological advantages over traditional cast iron bases. Additionally, the Company has introduced a real-time thermal compensation system on its Super Precision machines, which automatically adjusts the location of a machine's cutting tool to compensate for thermal expansion during the machining processing, thereby achieving higher precision. * TQM. Since 1987, the Company has been committed to Total Quality Management as a process for all of its operations. The Company's TQM process utilizes training and education of employees, along with steering, standing and work teams, in a formalized approach to continued quality improvement. The Company believes that TQM has helped decrease waste, improve manufacturing efficiency, increase product reliability, better control costs and meet customer requirements. * Acquisitions. As the machine tool industry continues to consolidate, the Company expects to have opportunities for strategic acquisitions. The Company will pursue acquisitions where it believes it can expand its product lines or improve its manufacturing capacity. Although the Company is presently evaluating, as it does on a regular basis, related businesses for possible acquisition, it is not engaged in negotiations for any specific acquisition. MACHINE TOOL INDUSTRY OVERVIEW There are two principal methods for producing a metal part or finished product: metal cutting and metal forming. All of the machines produced by the Company are metal cutting machines. Based on preliminary data provided by the Association for Manufacturing Technology ("AMT"), an industry trade association, and data provided by the U.S. Department of Commerce, sales of machine tools in the United States totaled $5.2 billion in 1994 of which $3.6 billion, or 69%, were in the metal cutting category and $1.6 billion, or 31%, were in the metal forming category. The machine tool business traditionally has been highly cyclical. Machine tools are predominately purchased by industrial companies or by independent job shops that, in turn, sell to industrial companies. As a result, machine tool producers are dependent on conditions in the industrial sector in their primary markets and are subject to the long-term cyclical nature of the industrial sector in the United States and in important markets abroad. Over the shorter term, the level of demand for machine tools can be affected by a number of other factors influencing industrial production, such as interest rates; the availability of skilled laborers; and governmental tax policies (such as investment tax credits or accelerated depreciation of capital goods) and by manufacturers' desires to improve their efficiencies (independent of their need to increase their capacity). Early metal working machines were either manually operated or specifically engineered for a production application. The advent of numerical control devices in 1952 further automated the operation of a machine tool and increased its efficiency, but had the drawback of requiring support from off-site data processing technicians. In 1976, microprocessors were integrated with numerical controls resulting in CNC machine tool systems, which allowed personnel on the shop floor to program and perform sophisticated metal cutting tasks without central office support. Because of this ability, as well as superior speed of operation, a CNC machine is able to produce the same amount of work as several manual machines with fewer operators. Since the introduction of CNC turning machines, continued advances in computer control technology have allowed for easier programming and additional machine capabilities. Since the development of CNC machine tools in the 1970s, the U.S. machine tool industry has been subject to substantially increased competition from foreign machine tool makers. During the 1970s, Japanese manufacturers introduced lines of CNC machine tools, including general precision horizontal CNC lathes, into the U.S. market, which captured substantial market share from U.S. machine tool manufacturers, including the Company. Japanese producers have been the most important entrants into the U.S. market, although European and other Asian manufacturers have also increased their U.S. market share. By 1986, foreign machine tool manufacturers had captured over 66% of the U.S. market for horizontal CNC lathes. The U.S. Government negotiated Voluntary Restraint Agreements ("VRAs") with Japan and Taiwan, which went into effect in January 1987 and limited Japanese and Taiwanese manufacturers to their 1981 market share levels of various machine tools. In the case of lathes, these shares were 57% and 3%, respectively. These VRAs expired in December 1993. While the VRAs were in effect, imports accounted for between 59% and 67% of the U.S. market for horizontal CNC lathes. Based on preliminary AMT data, in 1994 imports accounted for an estimated 66% of U.S. sales of horizontal CNC lathes, 51% of CNC machining centers, 79% of vertical CNC lathes, 69% of manual lathes and 55% of grinding machines. As a result of the substantial increase in imported machine tools and the success of CNC machine tools in the market, there has been a substantial consolidation of the U.S. machine tool industry over the past 15 years. Based on data from the U.S. Census Bureau, in 1982 there were 865 metal cutting machine tool companies in the United States operating 942 manufacturing facilities. By 1992, the number of these companies had declined to 393 operating 423 manufacturing facilities. The largest small metal cutting machine tools markets are for lathes, milling machines and grinders. A lathe, or turning machine, is one of the most commonly used machine tools and produces a part or finished product by moving a cutting tool against a metal bar or other workpiece that is rotating at a very high speed in a spindle mechanism. Because of the nature of the operation, virtually all parts made on a lathe are round. By varying the speed of rotation of the workpiece, the type of tool used and the depth to which the tool is inserted into the workpiece, lathes can create parts with a wide array of shapes and finishes. Typical parts produced on a lathe include valve stems, flywheels and input shafts for the automotive industry, bone screws and artificial knee joints for the medical industry, gears for inboard/outboard motors and computer hard drive components. Lathes are most frequently used to shape metal workpieces; however, they can also produce parts from plastics, composites and other exotic materials. CNC lathes are classified as either "horizontal" or "vertical." In a horizontal lathe, the workpiece and the spindle mechanism on which the workpiece rotates are aligned parallel to the floor. This alignment permits the use of a barfeeder to automatically feed up to 12 feet of bar stock into the machine. In a vertical lathe, the workpiece and the spindle mechanism are perpendicular to the floor, with the various cutting tools located above them. This alignment permits the customer to produce larger, heavier and more oddly shaped parts on a machine that uses less floor space than a horizontal lathe. Because of the spindle's orientation, gravity aids in seating the workpiece properly in the workholding device. Parts are loaded manually or with a robotic or robotic-like materials handling device. Horizontal CNC lathes are further categorized by the U.S. Department of Commerce into three categories depending on the horsepower of the main spindle: small (less than 25 horsepower); medium (between 25 and 50 horsepower); and large (over 50 horsepower). Based on preliminary AMT data, in 1994 sales in the United States of small power CNC horizontal lathes totaled $460,900,000 and sales of vertical CNC lathes totaled $49,000,000. Based on preliminary AMT data, unit sales in the small power lathe market averaged 82% of the total horizontal CNC lathe market in the United States during the period 1992 through 1994. In addition, lathes are categorized as either "general precision" or "higher precision" machines based on the precision levels that they are capable of achieving. Currently, in the machine tool industry generally, higher precision lathes are capable of producing parts within machining tolerances on the order of two ten-thousandths of an inch (2/10,000") or better, and general precision lathes are capable of producing parts within machining tolerances on the order of five ten-thousandths of an inch (5/10,000") or better. The aerospace, medical equipment and electronics industries have traditionally been important buyers of higher precision lathes, while automobile manufacturers and their suppliers have traditionally been important buyers of general precision lathes. A milling machine produces a part by moving a rotating cutting tool against a stationary workpiece. Because of the nature of the operation, mills are generally used to make parts that are flat-sided (prismatic) and, like lathes, can create parts with a wide array of shapes and finishes. Some CNC milling machines, referred to as machining centers, are equipped with automatic tool changers that allow several different functions (milling, drilling, tapping, reaming and routing) to be performed in a programmed sequence on the same workpiece, without having to remove the workpiece from the machine. Based on preliminary AMT data, in 1994 sales in the United States of vertical machining centers totaled $527,400,000. Grinding is a machining process where a surface is shaped with a rotating abrasive wheel or tool and is similar to milling in terms of the shapes that can be generated. Grinding often follows the lathing or milling of a workpiece in order to produce a desired surface finish. Parts may also be produced directly on a grinding machine. However, although grinding machines are necessary in a number of applications, CNC lathes and milling machines are currently capable of obtaining the desired surface finish in a number of other applications without the need for separate grinding. The Company does not currently produce grinding machines. PRODUCTS The following table sets forth the Company's net sales by product line for each of the periods indicated:
Three Months Ended Year Ended December 31, March 31, 1990 1991 1992 1993 1994 1994 1995 (in thousands) Lathes and other machine tool equipment $ 54,573 $41,306 $42,537 $ 54,112 $ 65,829 $15,496 $24,584 Non-machine products and services 48,286 41,289 42,260 44,325 51,507 11,983 16,103 Total $102,859 $82,595 $84,797 $98,437 $117,336 $27,479 $40,687
LATHES AND OTHER MACHINE TOOL EQUIPMENT General. The Company offers a broad line of general and higher precision small and medium power CNC lathes, a vertical CNC machining center and higher precision manually controlled lathes. The Company seeks to build machines capable of consistently and cost-effectively producing very high precision parts. The Company's general precision and Super Precision lathes are capable of producing parts within machining tolerances on the order of 2/10,000" and 5/10,000" or better, respectively. In addition, the Company's Super Precision models are capable of producing parts to within a roundness tolerance of fifteen one millionths of an inch (15/1,000,000"). All of the Company's CNC and manual lathes can be equipped with adjustable chucks that permit the processing of workpieces of large diameters (generally up to 6 to 8 inches and even larger in some cases), although the degree of precision attained generally is reduced as the size of the workpiece increases. Manually controlled lathes, on which an operator uses hand wheels and switches to manipulate the cutting tools and control the rotational speed of the workpiece, anchored the Company's product line until the late 1970s. In the late 1970s, the Company began offering CNC lathes, which use a computer to control the machine's cutting operations. The Company currently manufactures 18 machine models, including 12 horizontal CNC lathes, four of which are Super Precision machines and eight of which are general precision machines, two vertical CNC lathes and a vertical CNC machining center, while continuing to offer three models of higher precision manually controlled lathes. Nine of the Company's horizontal CNC lathes compete in the small power lathe market and three models compete in the medium power market. These two markets represent the vast majority of all horizontal CNC lathes sold. Horizontal CNC Lathes. The Company offers 12 models of horizontal CNC lathes, all of which have been recently introduced or upgraded. These CNC models are sold with various option packages, at prices generally ranging between $78,000 and $159,000. Set forth below is additional information with respect to the Company's horizontal CNC lathes:
Diameter of Bar Stock Processed Year Introduced/ Super Precision/ Without Special Adapters: Model Type Upgraded General Precision Inches (Millimeters) Conquest T65 Slant bed 1992/1993 General Precision 2-1/2" (65mm) Conquest T51SP 1991/1993 Super Precision Model 2" (51mm) Conquest T51 1991/1993 General Precision 2" (51mm) Conquest T42SP 1989/1993 Super Precision Model 1-5/8" (42mm) Conquest T42 1988/1993 General Precision 1-5/8" (42mm) Conquest T42 BB 1993 General Precision 2" (51mm) CHNC III SP Flat bed 1984/1993 Super Precision Model 1-1/16" (32mm) CHNC III 1984/1993 General Precision 1-1/16" (32mm) Conquest GT Flat bed, gang tooling 1990 Super Precision Model 1-1/16" (32mm) Swiss turn 1993 General Precision 1" (25mm) Conquest ST25 1993 General Precision 3/4" (20mm) Conquest ST20 1993 General Precision 5/8" (16mm) Conquest ST16
The Company produces both flat bed and slant bed CNC lathes. The Company's first CNC lathes, introduced in the early 1980s, were flat bed models. Since that time, the Company has introduced slant bed CNC lathes, which allow for easier removal of metal shavings and have better ergonomics for machine tool operators. Currently, the majority of horizontal CNC lathes produced by the Company are slant bed models, which reflects the production mix for the industry as a whole. The Company also offers a gang tooling lathe, which provides advantages in certain applications. In a gang tooling lathe, the various cutting tools are laid out on a long flat plate, which slides back and forth to bring different tools into contact with the rotating workpiece. This layout saves time when multiple tools must be used to shape a single workpiece, because the tools can be brought to bear on the workpiece more rapidly than when they are held in a conventional turret, a mechanism that positions tools. More importantly, if a lathe is used to make a variety of different parts requiring frequent changes in the tools available for use, it is quicker for an operator to switch tooling plates in a gang tooling machine than to replace individual tools in a turret assembly. The Company's Swiss-turn lathes are designed to handle long, thin workpieces so that all cutting is done very close to the spindle, thereby minimizing workpiece deflection. Swiss-style machines generally incorporate a sliding headstock and spindle, which progressively pushes the bar through the spindle. Swiss-style machines have tradi- tionally been used by medical equipment, electronics and precision instrument makers; however, other industries have recently adapted them and they have become more prevalent in the markets served by traditional CNC lathes. The Company offers a number of option packages with each of its CNC lathes, the most important of which are live tooling, a sub-spindle and tailstock. If a lathe has live tooling, several of the tools in the turret are powered, rather than stationary. Power tools would typically include drills and milling cutters. A sub-spindle is a second spindle on the opposite side of the cutting tools from the main spindle, permitting a short workpiece to be machined on both ends. The first end of a workpiece is machined while held by the main spindle, then the workpiece is automatically transferred to the sub-spindle and the other end is machined while held by the sub-spindle. A tailstock is used to hold longer workpieces to minimize deflection. Vertical CNC Lathes. In late 1994, the Company introduced two models of vertical CNC lathes, the Conquest VT 100 and VT 200, both of which are general precision machines. Depending on the options selected by the customer, the Company's vertical CNC lathes generally are priced between $157,000 and $185,000. The Company's vertical CNC lathes use less floor space than comparable horizontal lathes and are easier to use when working with heavy workpieces because they allow an operator to use gravity to help set the workpiece in the spindle. Additionally, parts requiring a chuck size of up to 17-3/4 inches can be machined on the Company's vertical CNC machines, while the maximum chuck size on its horizontal machines is 10 inches. Vertical CNC Machining Centers. In late 1994, the Company entered a new market with the introduction of a general precision vertical CNC machining center, the Conquest VMC 700. A machining center is a milling machine and is used to machine prismatic, as opposed to round, parts. Prices for the Conquest VMC 700 are generally between $99,000 and $120,000, depending on the configuration. Turnkey Systems. Since the late 1980s, the Company has offered its turnkey services through which it engineers complete systems for customers who desire one or more CNC machines to produce a specific part. In configuring complete systems, the Company will provide, in addition to the machines, the necessary computer programming and tooling, as well as robotics and other parts handling equipment manufactured by it or by others. Manual Lathes. The Company offers three models of manual lathes. These machines are sold with various options, at prices generally ranging between $5,000 and $38,000. The Company has shipped more than 40,000 manual lathes since the first of these models was introduced in the late 1930s. Since the introduction of CNC lathes in 1976, purchases of manual lathes have steadily declined in the industry. The Company's sales of manual machines have conformed to this industry trend and, in 1994, accounted for 4.2% of the Company's net sales. NON-MACHINE PRODUCTS AND SERVICES The Company's large base of installed equipment, coupled with the extensive tooling required to operate a lathe at close tolerances and the need to periodically replace worn-out tooling, have provided a source of significant demand for the Company's non-machine products and services. The Company's non-machine products and services have typically provided higher margins than its machine products and, for each of the past five years, have accounted for between 44% and 50% of its net sales. The Company offers an extensive line of non-machine products: * Workholding Devices. Workholding devices are used to hold a workpiece in the rotating spindle, include collets, chucks, feed fingers and pads. The Company currently offers over 30,000 different workholding devices, which may be used on both its lathes and those produced by others, as well as on automatic screw machines. Most of these workholding devices are carried in stock. * Toolholding Devices and Accessories. Toolholding devices and accessories are used primarily for the Company's machines. Toolholding devices attach to the turret or gang and hold the drills and other tools that are brought into contact with the rotating workpiece. The Company's accessories include a complete line of the Company's and other manufacturers' bar feed systems for its CNC horizontal lathes (which automatically feed bar stock into the spindle and permit a lathe to run for longer periods between restocking); part slides (which remove the finished part from the lathe); chip conveyors (which remove metal shavings from the work area); mist collectors (which remove excess water coolant vapor from the machine) and tool slides (which hold the tools in a gang tooling lathe). * Replacement Parts. The Company offers over 45,000 replacement parts, most of which are carried in stock, representing substantially all of the spare parts required for the Company's machines currently in service. If a customer requests a spare part not carried in stock, where practicable the Company will make the part for the customer. The Company provides a wide variety of after-sale services for customers, including equipment installation, operation and maintenance training, machine maintenance and in-field repair. The Company offers equipment installation and in-field repair services in the United States primarily through employees located at its headquarters in Elmira, New York and in many industrial areas of the country. These service personnel generally operate from fully equipped vans. The Company provides similar services in Canada, the United Kingdom and, to a lesser extent, Germany. The Company operates training centers in Elmira, Los Angeles and the United Kingdom. When a machine is sold, the customer's operators are offered two weeks of training as part of the purchase price of the machine. The Company will also provide training for a customer's personnel at other times for a fee. TECHNOLOGICAL FEATURES The Company has incorporated a number of technological advances in its machine tools and non-machine products. In 1987, the Company introduced Harcrete machine bases, which it now uses on all but two of its horizontal CNC lathes. These proprietary bases are made of a polymer composite, which was adapted by the Company for use on its machine tools. The Company believes that Harcrete bases offer several technological advantages over the cast iron bases traditionally used by machine tool makers, including better heat dissipation and increased stability, thereby increasing precision levels and tooling life. The Company manufactures its own Harcrete bases, thus allowing it to avoid the substantial delays sometimes experienced by other machine tool companies that purchase cast iron bases from outside suppliers. The Company has also introduced a real time thermal compensation system on its Super Precision machines. Higher precision is achieved through this patented system, which automatically adjusts the location of a machine's cutting tool to compensate for thermal expansion during the machining process. SALES AND MARKETING The Company sells directly to manufacturers in the automotive, medical equipment, aerospace and electronic industries, as well as in the defense, recreational equipment, farm equipment, construction equipment, energy and transportation industries, and to independent job shops serving these and other industries. At December 31, 1994, the Company had over 12,000 accounts that purchased products in 1993 or 1994. Sales of the Company's products are broadly distributed throughout the manufacturing sector and, during 1992, 1993 and 1994, no single customer accounted for more than 4.0% of the Company's net sales and the Company's three largest customers accounted for an aggregate of between 4.4% and 6.6% of its net sales. In the first quarter of 1995, three major customers in the automobile industry accounted for 21.1% of the Company's net sales. The Company primarily markets its machine tools through its direct sales force and through distributors and manufacturers' representatives in the United States and abroad. The Company uses a similar system of employee sales personnel and independent distributors in the United Kingdom and Canada. In other countries, the Company primarily sells through distributors. At March 31, 1995, the Company employed 25 sales personnel in the United States, three in Ontario and Quebec, Canada, five in the United Kingdom and one in Germany. At that date, the Company had ten distributors in the United States, two in Canada, 13 in Western Europe and 23 covering 16 other countries. As is typical in the industry, the Company's U.S. sales personnel reside in many different parts of the country and, with the exception of a Company demonstration facility in Los Angeles, are responsible for arranging for their own offices and transportation. Iverson & Company is the Company's exclusive distributor in Illinois and certain parts of Indiana and Wisconsin. In the past three years, Iverson has generated up to 12.3% of the Company's net sales. Under the terms of the current distribution agreement, three months after the Company notifies Iverson of a problem, either party may terminate the agreement upon three months notice if the problem has not been corrected to the Company's satisfaction. Iverson has been a Company distributor for over 50 years. If the distribution arrangement were terminated for any reason, the Company could experience a disruption in the distribution of its products to these areas. The Company believes any such disruption would be short-term; however, depending on the circumstances at the time, its operations could be adversely affected. One of the Company's U.S. distributors has the exclusive right to sell its products to the U.S. Government. The Company's eight other U.S. distributors have the exclusive right to distribute its products in particular markets, although these markets are located in less industrialized areas of the country. Each of these nine distribution arrangements is terminable by either party on 45 days notice. In 1994, none of the Company's distributors (other than Iverson) generated in excess of 3.5% of the Company's net sales and, as a group, they generated less than 9.0% thereof. The Company's sales personnel earn a fixed salary plus commission based upon a percentage of net sales. Certain of the Company's distributors operate independent businesses, purchase machine tools and non-machine products from the Company and maintain inventories of these products and spare parts for their customers, while other distributors merely sell machine tools on behalf of the Company. The Company's commission schedule is adjusted to reflect the level of aftermarket support offered by its distributors. As is common in its industry, the Company provides long-term financing for the purchase of its equipment by qualified customers. The Company regards this program as an important part of its marketing efforts, particularly to independent machine shops. Customer financing is offered for a term of up to seven years, with the Company retaining a security interest in the purchased equipment. In response to competitive pressures, the Company occasionally offers this financing at below market interest rates or with deferred payment terms. The present value of the difference between the actual interest charged on customer notes for periods during which finance charges are waived or reduced and the estimated rate at which the notes could be sold to financial institutions is accounted for as a reduction of the Company's net sales. See "Management's Discussion and Analysis--Liquidity and Capital Resources." The Company's non-machine products mainly are sold in the United States through telephone orders to a toll- free "800" telephone number, which is linked to an on-line computer order entry system maintained by the Company at its Elmira headquarters. In most cases, the Company is able to package and ship in-stock tooling and repair parts within 24 hours of receiving orders. In the case of some popular items, the Company can package and ship within several hours. The Company promotes recognition of its products in the marketplace through advertising in trade publications and participation in industry trade shows. In addition, the Company markets its non-machine products through publication of a general catalogue and other targeted catalogues, which it distributes to existing and prospective customers. In April 1995, General Motors Corporation named the Company a "Supplier of the Year" for 1994 in the category of lathes and machining centers. SERVICE AND SUPPORT The Company offers one, two and three-year warranties on new equipment purchases and provides after-sale services for customers, including equipment installation, operation and maintenance training, machine maintenance and in-field repair. The Company also stocks over 45,000 replacement parts, representing substantially all of the spare parts required for the Company's machines currently in service. Because of the high cost to its customers of down-time for repair, the Company believes that after-sale service and support are important factors in ensuring repeat sales of its equipment. BACKLOG The Company's order backlog at March 31, 1994 and 1995 was $22,975,000 and $42,502,000, respectively. The Company expects to ship substantially all of its March 31, 1995 backlog by the end of 1995. Of the March 31, 1995 backlog, 26.2% represented orders from the automobile industry, substantially all of which are scheduled to be shipped by the end of the fourth quarter of 1995. Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. Accordingly, the Company's backlog at March 31, 1995 is not necessarily indicative of actual shipments or sales for any future period, and period-to-period comparisons from 1994 to 1995 may not be meaningful. MANUFACTURING AND SUPPLY The Company manufactures and assembles its products at its Elmira, New York plant. Products are manufactured by the Company from various raw materials, including cast iron, sheet metal, bar steel and bearings. Although the Company's operations are highly integrated, it purchases a number of components from outside suppliers, including the computer and electronic components for its CNC machine tools, electric motors and hydraulic assemblies. There are multiple suppliers for virtually all of the Company's raw materials and components and the Company has not experienced a supply interruption in recent years. A major component of the Company's CNC machines is the computer and related electronics package. For the past six years, the Company has purchased these components exclusively from Fanuc Limited, a large Japanese electronics company. While the Company believes that design changes could be made to its machines to allow sourcing from several other existing suppliers, a disruption in the supply of the Fanuc components could cause the Company to experience a substantial disruption of its operations, depending on the circumstances at the time. See "Investment Considerations--Dependence on Foreign Electronics Supplier." The Company utilizes several quality and process control programs, including Total Quality Management. The Company believes that it operates its quality system to the requirements of the ISO 9000 Quality System of the International Standards Organization. The ISO 9000 Quality System is an internationally accepted quality standard for commercial operations, such as product design verification, reviewing the quality of suppliers, imperfection and testing requirements and maintaining quality records. The Company believes that these initiatives have helped it maintain the quality and reliability of its products. RESEARCH AND DEVELOPMENT The Company's ongoing research and development program has involved primarily the development of new products and the modification of existing products to meet market demands and the redesigning of existing products to reduce the cost of manufacturing. The cost of research and development, all of which has been charged to operations, amounted to $4,420,000, $4,216,000, $5,218,000, $1,200,000 and $1,233,000 in 1992, 1993, 1994 and the three months ended March 31, 1994 and 1995, respectively. PATENTS AND TRADEMARKS The Company believes that the growth of its businesses will be dependent upon the quality of its products and its relationships with its customers, rather than the extent of its patent or trademark protection. While the Company believes that its patents and trademarks have significant value, the loss of any single patent or trademark would not have a material adverse effect on the Company. COMPETITION The small and medium power machine tool industry is very competitive and highly fragmented and consists of a number of U.S., European and Asian competitors, none of which has a dominant market share. In 1994, over 78% of the Company's net sales were in the United States, with substantially all of the balance in the United Kingdom, Canada and China. The Company competes primarily in the small and medium power CNC lathe business and in the sale of non-machine products for lathes. In terms of sales, the Company believes that it is the largest U.S.-based manufacturer of small horizontal CNC lathes and has the fourth largest overall market share in the United States behind three Japanese producers. Many of the Company's competitors are larger, and have substantially greater financial resources, than the Company. CNC Lathes. The Company produces Super Precision and high performance general precision lathes for sale in the United States and abroad. Both markets are extremely competitive. In the higher precision part of the market, the Company primarily competes in the United States with two Japanese producers. Several German manufacturers also compete with the Company primarily in Europe. In the general precision part of the market, the Company competes with a number of U.S., European and Asian manufacturers. In both parts of the lathe business, the Company competes on the basis that the superior quality, reliability, value and technological characteristics of its machines justify a somewhat higher price than for a competing machine. In both markets, availability, rapid delivery and customer support are important competitive factors, as is, increasingly, the ability of the manufacturer to offer a broad line of products. While the Company's higher quality products have traditionally generated somewhat higher prices, price is nevertheless an important competitive factor, particularly in the larger general precision market. The Company believes that the competitive situation for its new machining center will be similar to that for general precision CNC lathes. Non-Machine Products. The principal competitive factors in the market for non-machine products are rapid delivery time, quality and value. The Company believes that it is a major worldwide supplier of workholding devices. PROPERTY The following table sets forth certain information as of March 31, 1995 relating to the Company's principal facilities.
Approximate Lease Expiration Location Type of Facility Square Feet Owned/Leased Date Elmira, NY Manufacturing, engineering, 430,000 Owned -- turnkey systems, marketing, sales, demonstration, service and administration Elmira, NY Warehouse 176,000 Owned -- Los Angeles, CA Sales, demonstration 14,500 Leased December 31, 1997 Exeter, England Sales, marketing, service, 20,000 Leased June 30, 1997 turnkey systems and administration Krefeld, Germany Sales, service 1,500 Leased December 31, 1995 Toronto, Canada Sales, service 4,600 Leased January 30, 1996
As a result of the Company's launch of 14 new machine tool models since 1991 and the recent upturn in the machine tool market, the Company's Elmira, New York manufacturing facility is currently operating near full capacity and the Company expects this facility will continue to operate near full capacity for the balance of 1995. In April 1995, the Company began construction of three additions to its manufacturing facility, which, when completed, will increase the size of the facility from 430,000 square feet to 500,000 square feet and increase its machine making capacity by approximately 25%. Construction is expected to be completed by early 1996. The Company estimates that the cost of these additions, together with the necessary machinery and equipment, will be $15,000,000, all or most of which will be funded with a portion of the proceeds of this offering. The Company believes that, upon completion of the planned expansion of its principal facility, its existing facilities will be sufficient to meet its current needs and believes that such facility will accommodate further expansion if additional capacity is required in the future. In general, the Company believes that its operating facilities are in good operating condition. EMPLOYEES As of March 31, 1995, the Company employed 965 people, 925 of whom were located in the United States. Of its employees, 680 were employed in manufacturing and distribution operations, 80 were engaged in research and development, 167 were employed in sales and marketing, service and training and 38 were employed in administration and other areas. All of the Company's employees, who average over 14 years of tenure with the Company, are full time and none of the Company's employees belong to a labor union. The Company has never had a strike at any of its facilities and the Company believes that its relations with its employees are good. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive federal and state legislation and regulation relating to environmental matters. The Company believes it is currently in material compliance with applicable environmental laws and regulations. Future regulations, under the Clean Air Act and otherwise, are expected to impose stricter emission requirements on the metal working industry. While the Company believes that current pollution control measures at most of the emission sources at its New York manufacturing facility will meet these anticipated future requirements, additional measures at some sources may be required. The Company does not believe that these anticipated future requirements are likely to have a material adverse effect upon its financial condition, results of operations or competitive position. Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Activities at properties owned by the Company and on adjacent areas have resulted in environmental impacts. In particular, the Company's Elmira, New York manufacturing facility is located within the Kentucky Avenue Well Field site, which is listed on the National Priorities List of sites designated for cleanup by the United States Environmental Protection Agency ("EPA") because of groundwater contamination of an underlying aquifer. The Kentucky Avenue Well Field site encompasses an area of approximately three square miles, which includes sections of the Town of Horseheads, the Village of Horseheads and the Village of Elmira Heights, New York. The Company, however, has never been named as a potentially responsible party at the site. Environmental sampling on the Company's property within the site conducted under the supervision of regulatory authorities found no evidence that the Company's property is the source of the groundwater contamination in the aquifer. Based on this sampling and on other studies conducted within the aquifer region, off-site sources for the groundwater contamination have been identified by the regulatory authorities. The Company has received a request for information from EPA in connection with the Tri-Cities Barrel site, a barrel recycling facility in Broome County, New York, which is also listed on the National Priorities List. The Company responded to EPA's request in August of 1994 and has not been notified to date by EPA that it is a potentially responsible party at this site. The Company's information indicates that the Company sent only 261 empty drums to Tri-Cities for recycling, a quantity that is minimal according to information the Company has received from the group of parties that have been named as potentially responsible by EPA (the "PRP Group"). The PRP Group has informally discussed offering a de minimis settlement to parties with less than 5,000 drums. The Company may consider such a settlement, if formally offered. Otherwise the Company will vigorously defend inclusion as a potentially responsible party at the site. As a result, the Company does not expect that it will incur any material liabilities in connection with this site. Environmental sampling following the removal of an underground storage tank at the Company's Elmira warehouse disclosed the presence of hydrocarbon contamination in surrounding soils. An environmental consultant retained by the Company prepared a site assessment and remedial action plan, which were approved by the New York State Department of Environmental Conservation ("DEC"). The Company has entered into an agreed Stipulation with DEC to remediate the site in accordance with the remedial action plan. Pursuant to the timetable set forth in the remedial action plan, the Company anticipates being able to complete the construction phase of the cleanup work at the site by the end of 1995. The Company has reserved $500,000 for the construction work, which amount was charged to 1994 operations. The Company anticipates that ongoing operation and maintenance expenses for the cleanup will be less than $100,000 annually. Although the Company believes, based upon information currently available to management, that it will not have material liabilities for environmental remediation, there can be no assurance that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will not result in material liabilities. LITIGATION The Company is from time to time involved in routine litigation incidental to its operations. None of the litigation in which the Company is currently involved, individually or in the aggregate, is material to its financial condition or results of operations. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of March 31, 1995, are as follows:
Name Age Position Robert E. Agan 56 President and Chief Executive Officer and director Malcolm L. Gibson 54 Senior Vice President and Chief Financial Officer J. Allan Krul 52 Senior Vice President and Chief Operating Officer Douglas A. Greenlee 47 Vice President and director Douglas C. Tifft 40 Vice President J. Philip Hunter 52 Secretary and director Richard J. Cole 63 Director John W. Bennett 61 Director James L. Flynn 60 Director E. Martin Gibson 57 Director Dr. Eve L. Menger 52 Director Whitney S. Powers 71 Director
Robert E. Agan has been the President and Chief Executive Officer of the Company since 1983 and has been a director of the Company since 1980. He is a director of Chemung Financial Corporation, a bank holding company ("Chemung Financial"). Malcolm L. Gibson has been Senior Vice President and, Chief Financial Officer of the Company since 1994. From 1985 to 1994, he was Vice President--Finance and Treasurer of the Company. J. Allan Krul has been Senior Vice President and Chief Operating Officer of the Company since 1994. From 1991 to 1994, he was Vice President--General Manager Machine Operations of the Company and, from 1988 to 1991, he was Vice President--Engineering of the Company. Douglas A. Greenlee has been Vice President--Business Development of the Company since 1992 and has been a director of the Company since 1979. From 1974 to 1992, he was an attorney with the law firm of Hazel & Thomas, P.C., Winchester, Virginia. Douglas C. Tifft has been Vice President--Personnel of the Company since 1988. J. Philip Hunter has been Secretary of the Company since 1993 and has been a director of the Company since 1992. He has been a partner with the law firm of Sayles, Evans, Brayton, Palmer & Tifft, Elmira, New York since 1972. Richard J. Cole has been a director of the Company since 1991. Since 1991, he has been a vice president of Meritus Consulting Services, a management consulting firm and, from 1988 to 1991, he was a division vice president of IBM Corporation. John W. Bennett has been a director of the Company since 1993. Since 1991 he has been president and chief executive officer of Chemung Financial and president and chief executive officer of Chemung Canal Trust Company ("Chemung"). From 1988 to 1991 he was president and chief operating officer of Chemung. He is a director of Chemung Financial. James L. Flynn has been a director of the Company since 1984. Mr. Flynn has been retired since 1994. From 1990 to 1994, he was senior vice president--investment services of Corning Incorporated ("Corning"), a manufacturer of specialty glass and ceramic products and provider of clinical laboratory services. E. Martin Gibson has been a director of the Company since 1981. Since April 1995, he has been chairman (non-executive) of International Technology Corp., a provider of environmental services. From 1990 to 1994, he was chairman and chief executive officer of Corning Lab Services, Inc., a provider of clinical laboratory services, and a subsidiary of Corning and, from 1983 to 1990, he was a group president of Corning. He is a director of Novacare, Inc., a provider of healthcare services. Dr. Eve L. Menger has been a director of the Company since February 1995. She has been director of characterization science of Corning since 1991 and from 1987 to 1991, was vice provost for University--Industry Relations and Professor of Chemistry at the University of Virginia. Whitney S. Powers has been a director of the Company since 1980. He has been the president of Black Boxes Co., a mechanical design consulting firm, since 1990. He is a director of Chemung. There are no family relationships between any directors or executive officers. TERMS OF DIRECTORS The Company's Restated Certificate of Incorporation and By-laws provide that the directors of the Company are divided into three classes, each class consisting of three directors. The directors in each class serve for three-year terms and until their successors are elected. In the event that the number of directors on the Board of Directors is changed, the number of directors assigned to each class will be adjusted so that each class is as nearly equal in number as possible. Messrs. Agan, Cole and E.M. Gibson are Class I directors whose terms expire at the annual meeting of shareholders (the "Annual Meeting") in either 1996 or 1997, at the Annual Meeting in 1998 and at every third Annual Meeting thereafter. Messrs. Hunter and Powers and Dr. Menger are Class II directors whose terms expire at the Annual Meeting in either 1996 or 1997, at the Annual Meeting in 1999 and at every third Annual Meeting thereafter. Messrs. Bennett, Flynn and Greenlee are Class III directors whose terms expire at the Annual Meeting in 1996 or 1997, at the Annual Meeting in 1997 and at every third Annual Meeting thereafter. EXECUTIVE COMPENSATION The following table presents information concerning compensation paid for services to the Company during the periods indicated to the President and Chief Executive Officer and the four other most highly compensated executive officers of the Company in 1994. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Name and Restricted Stock All Other Principal Position Year Salary Bonus Awards (1) Compensation (2) Robert E. Agan 1994 $225,000 $150,000 $375,000 $591 President and Chief 1993 202,083 95,000 480,000 508 Executive Officer 1992 165,600 12,377 -0- 400 J. Allan Krul Senior Vice President 1994 142,000 85,000 200,000 419 and Chief Operating 1993 130,998 55,000 192,000 338 Officer 1992 110,700 8,882 -0- 308 Malcolm L. Gibson Senior Vice President 1994 117,000 42,000 -0- 571 and Chief Financial 1993 112,875 27,000 120,000 495 Officer 1992 101,250 8,241 -0- 382 Thomas T. Connelly 1994 124,000 38,000 -0- 548 Treasurer 1993 120,333 25,000 120,000 475 1992 108,000 9,231 -0- 373 Douglas A. Greenlee 1994 104,000 36,000 -0- 306 Vice President 1993 100,333 24,000 192,000 200
(1) As of December 31, 1994, Messrs. Agan, Krul, M.L. Gibson, Connelly and Greenlee held 120,950, 61,500, 37,925, 42,025 and 16,400 restricted shares of Common Stock, respectively, having an aggregate value on that date of $1,711,000, $870,000, $536,500, $594,500 and $232,000, respectively, based upon an appraisal by Crestar Securities Corporation ("Crestar"). The restrictions on these shares lapse on a scheduled time basis or upon the earlier death of the holder. The officers are entitled to receive any and all dividends paid on the stock. (2) Represents the value as of December 31, 1994, based upon an appraisal by Crestar, of shares of the Company's stock allocated to each individual in accordance with provisions of the Company's Employee Stock Ownership and Savings Plan. PENSION PLAN The Company maintains a non-contributory defined benefit Pension Plan (the "Employee Pension Plan") for all employees. Normal retirement is at age 65; however, an employee may elect to retire before age 65 under certain conditions. Annual pensions are computed on the basis of adjusted career average compensation, excluding bonuses. The adjusted career average compensation formula is determined by taking the sum of (a) for service prior to December 1, 1993, 1.25% of the annual compensation rate as of December 1, 1993, times the number of years of service prior to December 1, 1993, plus (b) 1.5% of compensation on or after December 1, 1993. Pension amounts are not subject to reductions for Social Security benefits or offset amounts but are subject to federal law limitations on pensions payable under tax qualified plans. The Company also maintains a non-qualified, unfunded benefit plan called the Executive Supplemental Pension Plan ("Supplemental Plan") currently covering Messrs. Agan, M.L. Gibson and Krul. The annual benefits under the Supplemental Plan are determined on the basis of the average of the three highest years' base salary of the final five years of employment plus cash bonuses times 1.25% for each year of service, except that in the case of Mr. Krul, the percentages are 1.5% of each of his first five years of service, 2.0% of each of the next ten years and 2.2% for each additional year, contingent on Mr. Krul's continued employment with the Company until age 62 terminable by the Company upon the occurrence of certain stated events. A minimum benefit is provided under the Supplemental Plan for all covered executives equal to 1.2 times the benefit earned under the Employee Pension Plan. Benefits under the Supplemental Plan are reduced by benefits payable under the Employee Pension Plan. If the executive officers remain continuously employed at current compensations levels until retirement at the normal retirement age of 65, the estimated annual pension amounts payable under the Employee Pension Plan and Supplemental Plans for Messrs. Agan, Krul, M.L. Gibson, Connelly and Greenlee would be $196,500, $76,200, $79,700, $51,800 and $32,400, respectively. Pensions described are straight-life annuity amounts not reduced by joint and survivorship provisions which are available to all retirees through reductions in pensions otherwise payable. DIRECTORS' COMPENSATION Each director who is not an employee of the Company receives from the Company $5,000 per year, a meeting fee of $800 for each Board of Directors or committee meeting attended and is reimbursed for expenses incurred in attending meetings. In addition, in March of each year, each director receives 860 shares of Common Stock. The Company has in place a Deferred Directors Fee Plan that allows a director at his election to defer receiving up to 100% of his fees, exclusive of the supplemental stock payment, until the later of separation or age 70. EMPLOYMENT AGREEMENTS The Company has entered into written employment contracts with Messrs. Agan, Krul, M.L. Gibson, Greenlee and Douglas C. Tifft (the "officers") effective January 1, 1995. The term of each employment agreement is two years, with automatic, successive one-year extensions unless either party provides the other with 60 days' prior notice of termination. In the case of a change of control (as such term is defined in the employment agreements), the term of each officer's employment agreement will be automatically extended for a period of two years following the date of the change of control. With the exception of Mr. Agan, no officers previously had employment agreements with the Company. Mr. Agan has agreed that his prior four-year employment agreement will be superseded by his new agreement, except that certain provisions regarding death benefits are retained in his new agreement. Under the employment agreements, each officer will have the same position in the Company and annual base salary as immediately prior to entering into his respective employment agreement. The employment agreements provide for initial annual base salaries of $238,000, $156,000, $125,000, $109,000 and $89,000 to be paid to Messrs. Agan, Krul, M.L. Gibson, Greenlee and Tifft, respectively. Officers' bonuses shall be determined in accordance with an annual bonus policy. See "Incentive Cash Bonuses" below. If an officer is terminated without cause, or resigns for good reason (as such term is defined in the employment agreements), such officer will be entitled to continued payment of his base salary for the greater of six months or the remainder of the current term with the exception of Messrs. Agan's and Krul's agreements, which provide for the greater of 12 months of base salary or the remainder of the current term in this situation. If an officer is terminated without cause or resigns for good reason (as such term is defined in the employment agreements) on or after a change of control, or resigns for any reason at any time six months or more following a change of control, such officer will be entitled (i) to receive a lump sum cash payment equal to one and one-half times the sum of his base salary in effect immediately prior to his termination or resignation (or as in effect immediately prior to the change of control, if higher) and his average annual bonus for the three years preceding the change of control, and (ii) to participate, at the Company's expense, in the Company's welfare benefit plans for a period of three years following his resignation or termination. Such lump sum cash payments shall be subject to reduction to the extent necessary to prevent any amounts or benefits due from being deemed "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code. INCENTIVE CASH BONUSES The Salary, Bonus and Incentive Stock Committee (the "Committee") of the Board of Directors administers the Company's incentive cash bonus program. The program provides the Committee with flexibility from year to year to meet the ever-changing business environment and provides competitive profit-focused cash incentives for the corporate officers. The program allows the President to establish specific individual objectives for all officers other than himself, the achievement of which is rewarded by year-end cash bonuses if the Company is sufficiently profitable. Under the program the Committee establishes levels of bonus pools tied to specific per share corporate earnings targets with the President, then recommends the allocation of the bonus pool among officers based upon individual performance and achievement during the year and competitive data. The Committee's determination of Mr. Agan's cash bonus is more subjective and not subject to specific criteria. The amount fixed for 1994 was based upon the Company's improved financial performance, continued introduction of high quality and competitive products and increased plant productivity and customer satisfaction. INCENTIVE STOCK PLAN In early 1993 the Committee determined that the former practice of awarding stock options did not produce the desired long-term incentives for corporate executives and that restricted stock is a more appropriate vehicle to assist the Company in attracting and retaining top executives. Under the 1993 Incentive Stock Plan adopted by the Board of Directors, 405,000 shares of Common Stock have been set aside for grants to key employees of restricted stock and performance share awards. Under the 1993 Incentive Stock Plan, only restricted stock grants have been selected by the Committee for award to key executives with the resulting emphasis on increased executive ownership of Company stock, long-term corporate results and a substantial portion of executive pay and financial incentive linked to increases in shareholder value. Individual grant awards are based upon an executive's responsibilities and role in increasing shareholder value and the Committee's subjective evaluation of individual performance with no consideration given to the number of shares directly or indirectly owned. Restrictions on shares awarded lapse upon passage of time as established by the Committee on the date of the award, subject to earlier forfeiture. Under the 1993 Incentive Stock Plan, for the year ended December 31, 1994, Messrs. Agan and Krul were awarded 30,750 and 16,000, respectively, restricted shares of Common Stock subject to forfeiture and restrictions on transfer. Total unconditional vesting will occur only upon the completion of four to eight years of continuous service or, earlier, upon death, retirement after age 60, retirement prior to age 60 for reasons of total and permanent disability or retirement for other medical or health reasons which render an employee unable to perform his duties and responsibilities or termination in other limited circumstances. Partial vesting will occur if the employee is terminated during a period of one to eight years for reasons other than gross deviation from his duties and responsibilities. The recipients of Common Stock under the 1993 Incentive Stock Plan are entitled to vote the Common Stock and to receive dividends thereon from the date of grant. The 1993 Incentive Stock Plan provides that restricted shares shall no longer be subject to forfeiture and the Company shall deliver to the employee or his personal representative, free of any restrictions, certificates representing the shares of restricted stock in the event of a termination of the employee's employment with the Company or a subsidiary within four years following a change of control as defined in the agreements entered into pursuant to the 1993 Incentive Stock Plan. SALARY, BONUS AND INCENTIVE STOCK COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Committee are Mr. E.M. Gibson, as chairman, and Messrs. Hunter and Cole. Mr. Gibson has been a director of the Company since 1981. Mr. Hunter is the Secretary of the Company and has been a director of the Company since 1992. Mr. Hunter is also a partner with the law firm of Sayles, Evans, Brayton, Palmer & Tifft, which is retained by the Company for the performance of legal services. Mr. Cole has been a director of the Company since 1991. CERTAIN TRANSACTIONS The Company in the normal course of business has retained Sayles, Evans, Brayton, Palmer & Tifft, of which Mr. Hunter is a partner, for legal services and expects to do so during the current year. Chemung, beneficial owner of 873,690 shares of Common Stock prior to the offering, of which Messrs. Agan and Powers are directors and Mr. Bennett is the president and chief executive officer and a director, provides various banking services, is trustee of the Pension Plan and is one of the trustees of the Employee Stock Ownership and Savings Plan. The Company has a $5,000,000 short-term line of credit with Chemung under which it had borrowed $3,500,000 at March 31, 1995. This line of credit was most recently renewed on May 10, 1995 and matures on April 30, 1996. The line bore interest at the rate of 6.125% per annum on March 31, 1995 and the loan under the line of credit will be repaid with the proceeds of this offering. See "Use of Proceeds." The Company sold customer notes to Chemung totaling approximately $3,000,000 in 1994 and $3,000,000 in the first quarter of 1995. See "Management's Discussion and Analysis--Liquidity and Capital Resources." PRINCIPAL AND SELLING SHAREHOLDERS SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to beneficial ownership of shares of Common Stock, both as of April 25, 1995 and as adjusted to give effect to this offering, of all shareholders known by the Company to be the beneficial owners of more than 5% of its outstanding Common Stock:
Percent of Ownership Number of Shares Beneficially Prior to After Name Owned Offering Offering Chemung Canal Trust Company (1) 873,690 22.6% 14.3% 1 Chemung Canal Plaza Elmira, NY 14902 Douglas A. Greenlee (2) 337,817 8.8 5.5 205 Kennedy Drive Horseheads, NY 14845 Jeanne W. Ward (3) 309,163 8.0 5.1 5357 Lockmead Terrace Zephyrhills, FL 33541 Joan A. Sutantyo (4) 290,991 7.5 4.8 670 Allen Street San Marino, CA 91108 Robert E. Agan and Malcolm L. Gibson, 392,278 10.2 6.4 as trustees of the Hardinge Brothers, Inc. Employee Stock Ownership and Savings Plan (5) One Hardinge Drive Elmira, NY 14902 Robert E. Agan (6) 345,250 8.9 5.7 One Hardinge Drive Elmira, NY 14902 Malcolm L. Gibson (7) 217,381 5.6 3.6 One Hardinge Drive Elmira, NY 14902
(1) Held by Chemung Canal Trust Company ("Chemung") in various fiduciary capacities either alone or with others. It alone holds in its fiduciary capacity sole voting and dispositive powers as to 454,993 shares of Common Stock and sole voting (but not dispositive) powers as to an additional 275,857 shares of Common Stock. Chemung shares with others the voting and dispositive powers as to 142,840 shares of Common Stock. (2) Sole beneficial owner of 24,109 shares of Common Stock and shares as trustee with Jeanne W. Ward (see footnote 3) and Joan A. Sutantyo (see footnote 4) of a trust for the benefit of himself and others the voting and dispositive powers as to 271,966 shares of Common Stock. Shares as attorney-in-fact with others the voting and dispositive powers as to 41,742 shares of Common Stock. Not included are 220,871 shares of Common Stock held in trust by Chemung (see footnote 1) as trustee for the benefit of himself and others, nor 12,000 shares of Common Stock held in trust by another under which Mr. Greenlee is a contingent remainderman. (3) Shares as trustee with Douglas A. Greenlee (see footnote 2) and Joan S. Sutantyo (see footnote 4) of a trust for the benefit of herself and others the voting and dispositive powers as to 271,966 shares of Common Stock. Shares as trustee with another of two trusts for the benefit of others the voting and dispositive powers as to 37,197 shares of Common Stock. Not included are 220,871 shares of Common Stock held in trust by Chemung (see footnote 1) as trustee for the benefit of herself and others, nor 12,000 shares of Common Stock held in trust by another under which Ms. Ward is a contingent remainderman. (4) Sole beneficial owner of 19,025 shares of Common Stock and shares as trustee with Douglas A. Greenlee (see footnote 2) and Jeanne W. Ward (see footnote 3) of a trust for the benefit of herself and others the voting and dispositive powers as to 271,966 shares of Common Stock. Not included are 220,871 shares of Common Stock held in trust by Chemung (see footnote 1) as trustee for the benefit of herself and others. (5) Robert E. Agan and Malcolm L. Gibson, as trustees, share with the employee participants the power to vote and dispose of the shares of Common Stock pursuant to the terms of the Company's Employee Stock Ownership and Savings Plan. The power to dispose of the shares of Common Stock is restricted by the terms of the Plan. (6) Sole beneficial owner of 163,142 shares of Common Stock and shares as trustee with Malcolm L. Gibson (see footnote 7) voting and dispositive powers as to 165,924 shares of Common Stock owned by the Company's Employee Pension Plan. Includes 16,184 shares of Common Stock held in trust by Mr. Agan as the sole trustee for the benefit of his children. Excludes 392,278 shares of Common Stock for which Robert E. Agan and Malcolm L. Gibson share voting and dispositive power as trustees of the Company's Employee Stock Ownership and Savings Plan (see footnote 5). (7) Sole beneficial owner of 51,457 shares of Common Stock and shares as trustee with Robert A. Agan (see footnote 6) voting and dispositive powers as to 165,924 shares of Common Stock owned by the Company's Employee Pension Plan. Excludes 392,278 shares of Common Stock for which Malcolm L. Gibson and Robert E. Agan share voting and dispositive power as trustees of the Company's Employee Stock Ownership and Savings Plan (see footnote 5). SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information with respect to beneficial ownership of shares of Common Stock, both as of April 25, 1995 and as adjusted to give effect to this offering, by the directors and executive officers of the Company and by the directors and executive officers of the Company as a group.
Percent of Ownership Number of Shares Beneficially Prior to After Name Owned (1) Offering Offering Robert E. Agan (2) 345,250 8.9% 5.7% John W. Bennett 2,159 * * Richard J. Cole 2,109 * * Thomas T. Connelly 49,043 1.3 * James L. Flynn 7,519 * * E. Martin Gibson 9,198 * * Malcolm L. Gibson (3) 217,381 5.6 3.6 Douglas A. Greenlee (4) 337,817 8.8 5.5 J. Philip Hunter 2,322 * * J. Allan Krul 74,738 1.9 1.2 Dr. Eve L. Menger 861 * * Whitney S. Powers 9,667 * * All executive officers and directors as a group (14 persons including the above) (5) 944,444 24.5 15.5
* Less than one percent. (1) Includes shares which may be purchased pursuant to stock options held by directors that were exercisable within 60 days as of April 10, 1995. Messrs. Flynn, E.M. Gibson and Powers each held 4,075, 4,075 and 3,050, respectively, of such options to purchase Common Stock. Also includes all shares held by the Trustees of the Company's Employee Stock Ownership and Savings Plan allocated to members of the group who have shared voting and dispositive power with respect to such shares. The Trustees hold 6,797 shares of Common Stock for the benefit of Mr. Agan, 3,303 shares for Mr. Connelly, 301 shares for Mr. M.L. Gibson, 494 shares for Mr. Greenlee, 3,623 shares for Mr. Krul and 14,807 shares for all executive officers and directors as a group. Also includes shares of Common Stock subject to forfeiture and restrictions on transfer granted pursuant to the Company's 1988 and 1993 Incentive Stock Plans. (2) Sole beneficial owner of 163,142 shares of Common Stock and shares as trustee with Malcolm L. Gibson (see footnote 3) voting and dispositive powers as to 165,924 shares of Common Stock owned by the Company's Employee Pension Plan. Includes 16,184 shares of Common Stock held in trust by Mr. Agan as the sole trustee for the benefit of his children. Excludes 392,278 shares of Common Stock for which Robert E. Agan and Malcolm L. Gibson share voting and dispositive power as trustees of the Company's Employee Stock Ownership and Savings Plan. See "Security Ownership of Principal Shareholders" above. (3) Sole beneficial owner of 51,457 shares of Common Stock and shares as trustee with Robert A. Agan (see footnote 2) voting and dispositive powers as to 165,924 shares of Common Stock owned by the Company's Employee Pension Plan. Excludes 392,278 shares of Common Stock for which Malcolm L. Gibson and Robert E. Agan share voting and dispositive power as trustees of the Company's Employee Stock Ownership and Savings Plan. See "Security Ownership of Principal Shareholders" above. (4) Sole beneficial owner of 24,109 shares of Common Stock and shares as co-trustee of a trust for the benefit of himself and others the voting and dispositive powers as to 271,966 shares of Common Stock. Shares as attorney-in-fact with others the voting and dispositive powers as to 41,742 shares of Common Stock. Not included are 220,871 shares of Common Stock held in trust by Chemung as trustee for the benefit of himself and others, nor 12,000 shares of Common Stock held in trust by another under which Mr. Greenlee is a contingent remainderman. See "Security Ownership of Principal Shareholders" above. (5) Includes 165,924 shares of Common Stock owned by the Company's Employee Pension Plan as to which Messrs. Agan and M.L. Gibson share, as trustees, voting and dispositive powers. SELLING SHAREHOLDER The Selling Shareholder listed in the table below has indicated its intention to sell the number of shares of Common Stock set forth opposite its name. The table sets forth information, as of April 25, 1995, and as adjusted to give effect to this offering, with respect to the beneficial ownership of the Common Stock by the Selling Shareholder. All information with respect to beneficial ownership prior to this offering has been furnished by the Selling Shareholder.
Ownership of Common Stock after Offering Number of Shares Beneficially Shares to Number of Percentage Name Owned prior to Offering be Sold Shares of Ownership Marine Midland Bank, N.A., Joseph C. Littleton, Robert G. Prochnow and William J. Gunnell III, as Trustees (1) ...................... 108,650 32,000 76,650 1.2%
(1) The Trustees share voting and dispositive powers for these shares of Common Stock, which are held in trust for the benefit of the individual Trustees, Mr. Littleton's wife and others. Mr. Littleton was an outside director of the Company, who retired from the Board of Directors in 1992. Mr. Prochnow was an employee of the Company, who retired in 1987. DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of (a) 20,000,000 shares of Common Stock, par value $.01 per share, and (b) 2,000,000 shares of Preferred Stock, par value $.01 per share. At April 10, 1995, there were 3,859,751 shares of Common Stock outstanding, including 293,581 shares of restricted Common Stock, which have been issued to officers and employees under the Company's 1988 and 1993 Incentive Stock Plans, but which had not yet vested. See "Management--Incentive Stock Plan." PREFERRED STOCK As of the date of this Prospectus, the Company has not issued any Preferred Stock. The Board of Directors of the Company is authorized, without action by the shareholders, to fix the number of shares, to determine the designation of any series of the authorized shares of the Company's Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to, or imposed upon, any unissued series of Preferred Stock. It is expected that, prior to the completion of this offering, a right to purchase shares of Series A Preferred Stock will be attached to each share of Common Stock. A maximum of shares of Series A Preferred Stock is expected to be authorized for issuance upon exercise of such rights. The rights of holders of Common Stock, as described below, will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future. See "Certain Anti-takeover Provisions--Shareholder Rights Plan" below. COMMON STOCK Voting. The holders of Common Stock are entitled to one vote on all corporate matters submitted to a vote of the holders of Common Stock for each share of Common Stock held. The Company's Restated Certificate of Incorporation, as amended, contains so-called supermajority provisions, which provide (i) that a director of the Company may be removed only for cause and upon the affirmative vote of the holders of 75% of the securities entitled to vote at an election of directors, and (ii) (a) at least 75% of all of the securities of the Company entitled to vote and (b) at least 75% of other than Majority Shareholders (defined as 10% beneficial holders) are required in order to effect certain mergers, sales of assets or other business combinations involving the Company. See "Certain Anti-takeover Provisions" below. Dividends. Subject to the rights, if any, of holders of Preferred Stock, holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of the assets of the Company lawfully available therefor. There can be no assurance that dividends will be paid. See "Dividend Policy." Liquidation. Subject to the rights, if any, of holders of Preferred Stock, in the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Common Stock will be entitled to share ratably in any liquidating distribution remaining after payment of all debts and other liabilities of the Company. Other. The holders of Common Stock do not have preemptive rights. The shares of Common Stock offered hereby, when issued, will be fully paid and non-assessable. Listing. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "HDNG." See "Common Stock Market Information." REGISTRAR AND TRANSFER AGENT The Registrar and Transfer Agent for the Common Stock is American Stock Transfer & Trust Company. CERTAIN ANTI-TAKEOVER PROVISIONS SPECIAL PROVISIONS UNDER THE CERTIFICATE AND BY-LAWS The Restated Certificate of Incorporation and the By-laws of the Company contain certain provisions that could make the acquisition of the Company by means of a tender offer, a proxy contest or otherwise difficult. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Board of Directors. The Company believes that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Restated Certificate of Incorporation and the By-laws of the Company, which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Staggered Board of Directors. The Restated Certificate of Incorporation and the By-laws of the Company provide that the Board of Directors will be divided into three classes of directors, each class constituting one-third of the total number of directors and with the classes serving staggered three-year terms beginning in 1997. The classification of the directors will have the effect of making it more difficult for shareholders, including those holding a majority of the outstanding shares, to force an immediate change in the composition of the Board of Directors. The Board of Directors believes that the longer time required to elect a majority of a classified Board of Directors helps to ensure the continuity and stability of the Company's management and policies since a majority of the directors at any given time will have had prior experience as directors of the Company. Removal of Directors and Filling of Vacancies. The Restated Certificate of Incorporation provides that a director of the Company may be removed only for cause and upon the affirmative vote of the holders of 75% of the securities entitled to vote at an election of directors. Newly created directorships and Board of Director vacancies resulting from death, removal or other causes may be filled only be a majority vote of the then remaining directors. Accordingly, it will be more difficult for shareholders, including those holding a majority of the outstanding shares, to force an immediate change in the composition of the Board of Directors. Supermajority Voting Provisions for Certain Business Combinations. The Restated Certificate of Incorporation requires the affirmative vote of (a) at least 75% of all of the securities of the Company entitled to vote and (b) at least 75% of other than Majority Shareholders (defined as 10% beneficial holders) in order to effect certain mergers, sales of assets or other business combinations involving the Company. These provisions could have the effect of delaying, deferring or preventing a change of control of the Company. Discretion to Consider Non-Price Issues. Under Section 717 of the New York Business Corporation Law ("NYBCL") and pursuant to the Restated Certificate of Incorporation, the Board of Directors may consider issues other than price in a proposed business combination. The considerations may include, but are not limited to, social and economic effects of the transaction upon the Company, its shareholders, customers, vendors, suppliers and other constituencies. SHAREHOLDER RIGHTS PLAN It is expected that, on May 16, 1995, the Company will adopt a shareholder rights plan and enter into a rights agreement (the "Rights Agreement") in connection therewith. The Rights Agreement provides that attached to each share of Common Stock outstanding on the date thereof and each share of Common Stock issued thereafter is one right (a "Right") that, when exercisable, entitles the holder of the Right to purchase one-hundredth of a share of Series A Preferred Stock (a "Unit") at a purchase price of $ (the "Purchase Price") subject to adjustment. The Rights will become exercisable ten business days after any person or group (other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or any such subsidiary, or, under certain circumstances, Chemung) becomes the beneficial owner of 20% or more of the Common Stock or commences a tender or exchange offer upon consummation of which such person or group would, if successful, own 30% or more of the Common Stock. In certain events (such as a person or group (other than the excluded group referred to above) becoming the beneficial owner of 20% or more of the Common Stock or a merger or other transaction with an entity controlled by such an acquiring person or group), exercise of the Rights would entitle the holders thereof (other than the acquiring person or group) to receive Units (or in certain circumstances Common Stock or common stock of the surviving corporation, or cash, property or other securities) with a market value equal to twice the Purchase Price. Exercise of the Rights may cause substantial dilution to a person who attempts to acquire the Company. No monetary value is expected to be assigned to the Rights, and they will not trade separately from the Common Stock unless and until they become exercisable. The Rights, which will expire ten years from the date of issuance, may be redeemed by the Board of Directors, at $.01 per Right, at any time prior to the expiration of ten business days after the acquisition by a person or group of affiliated or associated persons of beneficial ownership (other than the excluded group referred to above) of 20% or more of the outstanding Common Stock, except as the Rights Agreement may otherwise provide. The terms of the Rights Agreement will provide for amendment thereof by the Board of Directors without the consent of the holders of the Rights. If adopted, the Rights Agreement may have certain anti-takeover effects, although it is not intended to preclude any acquisition or business combination that is at a fair price and otherwise in the best interests of the Company and its shareholders as determined by the Board of Directors. However, a shareholder could potentially disagree with the Board of Directors' determination of what constitutes a fair price or the best interests of the Company and its shareholders. CERTAIN POTENTIAL DISADVANTAGES OF THE ANTI-TAKEOVER MEASURES The above anti-takeover provisions may make more difficult and discourage an attempt to acquire control of the Company by a potential bidder who does not wish to negotiate with the Board of Directors or who is unable to reach an agreement with the Board of Directors. In such a situation, these provisions could discourage a transaction that a majority of the Company's shareholders favor or in which shareholders could receive a significant premium over then-current market prices. Because adoption of these provisions could discourage or render more difficult a takeover attempt, there may be a reduced possibility of large temporary fluctuations in the market price of the Company's Common Stock resulting from actual or rumored takeover attempts. Shareholders should also note that, in situations such as unsolicited tender offers, the personal interest of members of management and the Board of Directors in retaining their salaries and positions may conflict with the interests of the shareholders in selling their shares at an attractive price. Anti-takeover measures of this type have generally been criticized as efforts of corporations' managements to entrench themselves without regard to the needs and desires of shareholders. Management and the Board of Directors believe, however, that such potential conflicts of interest will not affect the proper exercise of their fiduciary duty to use their best judgment on behalf of the Company and all of its shareholders. ANTI-TAKEOVER LEGISLATION Section 912 of the NYBCL provides in essence that in the event a person acquires 20% or more of the voting stock of a New York corporation (an "Interested Shareholder"), the corporation and the Interested Shareholder, or any affiliated entity, may not engage in certain business combinations for a period of five years following the date the person became an Interested Shareholder unless the board of directors of such corporation approves such share acquisition or business combination before the Interested Shareholder acquires 20% or more of the corporation's voting stock. Business combinations for this purpose include, among other things, (a) a merger or consolidation, (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of the assets of the corporation where the assets have an aggregate market value equal to 10% or more of (i) the aggregate market value of the corporation's assets determined on a consolidated basis, (ii) the market value of outstanding capital stock or (iii) the earning power or net income of the corporation determined on a consolidated basis and (c) certain transactions that result in the issuance of capital stock of the corporation to the Interested Shareholder. Under certain circumstances, Section 912 of the NYBCL makes it more difficult for an Interested Shareholder to effect various business combinations with a corporation for a five-year period. In addition, a shareholder dissatisfied with the form or amount of consideration received in a merger transaction may have statutory dissenters' rights under Section 910 of the NYBCL. Such shareholder also could bring suit against the Board of Directors and the majority shareholder of the Company alleging breach of fiduciary duty. New York courts have held that a majority shareholder of a corporation involved in a merger has a fiduciary duty with respect to the other shareholders. UNDERWRITING The Underwriters named below have severally agreed, subject to certain conditions, to purchase from the Company and the Selling Shareholder the aggregate number of shares of Common Stock set forth opposite their respective names.
Number of Underwriter Shares Wertheim Schroder & Co. Incorporated Prudential Securities Incorporated Total 2,282,000
The Underwriting Agreement provides that the several Underwriters are obligated to purchase all the 2,282,000 shares of Common Stock offered hereby, if any are purchased. Wertheim Schroder & Co. Incorporated and Prudential Securities Incorporated, as representatives of the several Underwriters (the "Representatives"), have advised the Company that the Underwriters propose to offer the shares to the public initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters propose initially to allow a concession not in excess of $ per share to certain dealers, including the Underwriters; that the Underwriters and such dealers may initially allow a discount of not in excess $ per share to other dealers; and that the initial public offering price and the concession and discount to dealers may be changed by the Representatives after the initial public offering. The Company has granted to the Underwriters an option, expiring at the close of business on the 30th day after the date of the Underwriting Agreement, to purchase up to an additional 342,300 shares of Common Stock, at the initial public offering price less underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. The Underwriters may exercise the option only to cover over allotments, if any, in the sale of shares of Common Stock in this offering. To the extent that the Underwriters exercise this option, each Underwriter will be committed, subject to certain conditions, to purchase a number of additional shares proportionate to such Underwriter's initial commitment. The Company, the Selling Shareholder and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company, its directors and officers, the Selling Shareholder and certain other shareholders have agreed not to offer to sell, sell, grant any option to purchase or otherwise dispose of any shares of Common Stock held by them for a period of 180 days after the date of this Prospectus without the prior written consent of Wertheim Schroder & Co. Incorporated, subject to certain exceptions. Wertheim Schroder & Co. Incorporated has from time to time provided financial advisory services to the Company, for which it has received customary fees. Prior to this offering, the Company's Class A Common Stock and Class B Common Stock were traded in small amounts and on a limited and sporadic basis. The Company believes that the prior sales prices and quotations for the Common Stock do not provide a meaningful indication of the value of the Common Stock. The initial public offering price of the Common Stock has been determined by negotiations among the Company, the Selling Shareholder and the Representatives. Among the factors considered in such negotiations were the Company's results of operations and financial condition, the prospects for the Company and for the industry in which the Company operates, the Company's capital structure and prevailing market conditions in the securities market. LEGAL MATTERS The validity of the Common Stock being offered hereby will be passed upon for the Company by Sayles, Evans, Brayton, Palmer & Tifft, Elmira, New York and Shearman & Sterling, New York, New York and for the Underwriters by Fulbright & Jaworski L.L.P, New York, New York. J. Philip Hunter, Secretary and a director of the Company and, at April 25, 1995, beneficial owner of 2,322 shares of Common Stock of the Company, is a partner of Sayles, Evans, Brayton, Palmer & Tifft. EXPERTS The consolidated financial statements of the Company at December 31, 1993 and 1994, and for each of the three years in the period ended December 31, 1994, appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance therewith, is required to file reports and other information with the Securities Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected at and obtained from the Commission at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the public reference facilities of the Commission's Regional Offices: Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661, Suite 1400; and New York Regional Office, Seven World Trade Center, New York, New York 10048, 13th Floor. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. Application has been made by the Company for quotation of the Common Stock on the Nasdaq National Market and reports, proxy statements and other information concerning the Company will be available for inspection at the office of the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-2 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement"), of which this Prospectus forms a part, covering the Common Stock to be sold pursuant to this offering. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to such contracts, agreement, or other document filed as an exhibit to the Registration Statement, reference is made to such exhibit. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, filed by the Company with the Commission pursuant to the Exchange Act, are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1994. 2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. Any statement contained in a document incorporated by reference in this Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owners, to whom this Prospectus is delivered, on the request of such person, a copy (without exhibits, other than exhibits specifically incorporated by reference) of any or all of the documents incorporated by reference in this Prospectus. Written or oral requests for such copies should be directed to Elizabeth Tranter, at One Hardinge Drive, Elmira, New York 14902, telephone number (607) 734-2281. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Consolidated Financial Statements: Report of the Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1993 and 1994 and March 31, 1995 F-3 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1992, 1993 and 1994 and the three months ended March 31, 1994 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and the three months ended March 31, 1994 and 1995 F-5 Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT AUDITORS Board of Directors Hardinge Brothers, Inc. We have audited the accompanying consolidated balance sheets of Hardinge Brothers, Inc. and subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hardinge Brothers, Inc. and subsidiaries at December 31, 1993 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 3 and 6 to the financial statements, in 1992 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. ERNST & YOUNG LLP Syracuse, New York January 25, 1995, except for Note 8, as to which the date is The foregoing report is in the form that will be signed upon the completion of the capital account transactions described in Note 8 to the financial statements. ERNST & YOUNG LLP Syracuse, New York April 26, 1995 SEE ACCOMPANYING NOTES. HARDINGE BROTHERS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, March 31, 1993 1994 1995 (Unaudited) (in thousands) Assets Current assets: Cash $ 3,354 $ 3,783 $ 2,869 Accounts receivable 15,763 20,237 26,896 Notes receivable 5,768 4,935 5,442 Inventories (Note 1) 44,290 50,698 54,079 Deferred income taxes (Note 3) 646 981 981 Prepaid expenses 877 630 863 Total current assets 70,698 81,264 91,130 Property, plant and equipment: Land and buildings 20,078 20,695 20,501 Machinery, equipment and fixtures 46,115 52,132 53,089 Office furniture, equipment and vehicles 3,455 3,251 3,239 69,648 76,078 76,829 Accumulated depreciation 43,538 45,812 46,634 26,110 30,266 30,195 Other assets: Notes receivable 12,460 7,744 8,899 Deferred income taxes (Note 3) 980 1,439 1,373 Other 921 1,013 894 14,361 10,196 11,166 Total assets $111,169 $121,726 $132,491 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 6,801 $ 9,415 $ 10,472 Notes payable to bank 676 3,500 3,500 Accrued expenses 2,465 4,571 5,672 Accrued pension plan expense 816 339 514 Dividends payable 752 959 -- Accrued income taxes 19 1,246 1,714 Current portion of long-term debt (Note 2) 714 714 714 Total current liabilities 12,243 20,744 22,586 Other liabilities: Long-term debt (Note 2) 18,357 15,164 21,245 Employee benefit obligation (Note 6) 350 150 100 Accrued pension plan expense -- 1,055 1,101 Accrued postretirement benefits (Note 6) 4,757 4,837 4,864 23,464 21,206 27,310 Shareholders' equity (Notes 4 and 8): Common stock, $5 par value: Class A: Authorized shares--3,000,000 Issued shares--975,912 4,880 4,880 Class B: Authorized shares--3,000,000 Issued shares--912,910 4,564 4,564 Common stock, $.01 par value: Authorized shares--20,000,000 Issued shares--3,918,790 39 Additional paid-in capital 619 655 11,439 Retained earnings 71,206 74,853 77,633 Treasury shares (565) (361) (740) Cumulative foreign currency translation adjustment (1,866) (1,874) (1,739) Deferred employee benefits (Note 6) (3,376) (2,941) (4,037) Total shareholders' equity 75,462 79,776 82,595 Total liabilities and shareholders' equity $111,169 $121,726 $132,491
See accompanying notes. HARDINGE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1992 1993 1994 1994 1995 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales $84,797 $98,437 $117,336 $27,479 $40,687 Cost of sales 55,905 63,169 76,937 17,930 26,774 Gross profit 28,892 35,268 40,399 9,549 13,913 Selling, general and administrative expenses 24,864 25,804 27,882 6,572 8,415 Restructuring costs 1,086 -- -- -- -- Income from operations 2,942 9,464 12,517 2,977 5,498 Interest expense 1,380 1,343 1,479 371 476 Interest (income) (1,160) (763) (453) (134) (121) (Gain) on sale of assets -- -- (442) -- (326) Income before income taxes 2,722 8,884 11,933 2,740 5,469 Income taxes (Note 3) 1,152 3,730 5,214 1,128 2,165 Income before cumulative effect of changes in accounting methods 1,570 5,154 6,719 1,612 3,304 Cumulative effect of changes in accounting methods (Notes 3 and 6) (2,754) -- -- -- -- Net (loss) income (1,184) 5,154 6,719 1,612 3,304 Retained earnings at beginning of period 72,857 68,935 71,206 71,206 74,853 Less dividends declared 2,738 2,883 3,072 564 524 Retained earnings at end of period $68,935 $ 71,206 $ 74,853 $72,254 $77,633 Per share data (Note 8): Income before cumulative effect of changes in accounting methods $ .45 $ 1.45 $ 1.88 $ .45 $ .92 Cumulative effect of changes in accounting methods (.79) -- -- -- -- Net (loss) income $ (.34) $ 1.45 $ 1.88 $ .45 $ .92
See accompanying notes. HARDINGE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1992 1993 1994 1994 1995 (UNAUDITED) (IN THOUSANDS) Operating activities Income from continuing operations $ 1,570 $ 5,154 $ 6,719 $ 1,612 $ 3,304 Less: Cumulative effect of changes in accounting methods (2,754) -- -- -- -- Net (loss) income (1,184) 5,154 6,719 1,612 3,304 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 3,801 3,939 4,354 1,305 1,349 Provision for deferred income taxes (2,275) (40) (786) (183) 66 (Gain) on sale of assets (73 ) (44) (442) (63) (326) Foreign currency transaction loss (gain) 282 68 (147) 5 (129) Changes in operating assets and liabilities: Accounts receivable (2,916) (1,659) (4,340) (186) (6,508) Notes receivable (1,658) (3,892) 5,467 1,667 (1,645) Inventories 4,344 (6,364) (6,249) 186 (3,301) Other assets 265 (1,014) 109 (417) (124) Accounts payable (520) 2,824 2,603 (864) 1,043 Accrued expenses 731 680 3,922 1,716 1,773 Accrued postretirement benefits 4,651 107 80 20 27 Net cash provided by (used in) operating activities 5,448 (241) 11,290 4,798 (4,471) Investing activities Capital expenditures--net (4,429) (3,873) (8,046) (749) (1,141) Proceeds from sale of assets 291 274 864 205 447 Net cash (used in) investing activities (4,138) (3,599) (7,182) (544) (694) Financing activities Increase (decrease) in short-term notes payable to bank 83 (43) 2,791 (438) -- Increase (decrease) in long-term debt 1,286 6,786 (3,193) (2,500) 6,080 (Purchase) sale of treasury stock (142) (420) (346) 37 (379) Dividends paid (2,746) (2,676) (2,864) (1,316) (1,483) Net cash (used in) provided by financing activities (1,519) 3,647 (3,612) (4,217) 4,218 Effect of exchange rate changes on cash (286) (118) (67) (91) 33 Net (decrease) increase in cash (495) (311) 429 (54) (914) Cash at beginning of period 4,160 3,665 3,354 3,354 3,783 Cash at end of period $ 3,665 $ 3,354 $ 3,783 $ 3,300 $ 2,869
See accompanying notes. HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. PROPERTY, PLANT AND EQUIPMENT Property additions, including major renewals and betterments, are recorded at cost and are depreciated over their estimated useful lives. Upon retirement or disposal of an asset, the asset and related allowance for depreciation are eliminated and any resultant gain or loss is credited or charged to income. Depreciation is provided on the straight-line and sum of the years digits methods. Total depreciation expense on property, plant, and equipment was $3,307,000, $3,250,000, and $3,388,000 for 1992, 1993 and 1994, respectively. Total depreciation expense on property, plant, and equipment was $927,000 and $1,098,000 for the three months ended March 31, 1994 and 1995, respectively. 1. Significant Accounting Policies INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement No. 109, "Accounting for Income Taxes". The Company adopted the provisions of the new standard in its financial statements effective January 1, 1992. Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. FOREIGN CURRENCY TRANSLATION In accordance with Financial Accounting Standards Board Statement No. 52, all balance sheet accounts of foreign subsidiaries are translated at current exchange rates and income statement items are translated at an average exchange rate for the year. The gain or loss resulting from translating subsidiary financial statements is recorded as a separate component of shareholders' equity. Transaction gains and losses are recorded in operations. The Company enters into foreign currency exchange contracts to hedge against the risk of future currency rate fluctuations on payments from its foreign subsidiaries and on payments to foreign suppliers of materials used in production. At December 31, 1993 and 1994 and at March 31, 1995, the total amount of outstanding contracts was not significant. CONCENTRATION OF CREDIT RISK The Company manufactures and sells products to companies in diversified industries, with a substantial majority of sales occurring in North America and Western Europe. The Company performs periodic credit evaluations of its customers' financial condition. The Company offers financing terms of up to seven years for its customers in the United States and Canada and files a lien against the equipment purchased under those terms. No collateral is required for sales made on open account terms with payment due within thirty days. As of December 31, 1993 and 1994 the total amount of receivables from any one specific industry was not significant. As of March 31, 1995, 29% of the accounts receivable were from three major customers in the automobile industry. INCOME PER SHARE Income per share is computed using the weighted average number of shares of common stock outstanding during the year including common stock equivalents related to restricted stock. The number of shares outstanding has been adjusted to reflect the stock transactions as explained in Note 8 to the financial statements. The weighted HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)RESEARCH average number of common shares outstanding used to calculate income per share was 3,512,508, 3,565,033, 3,573,046, 3,545,168 and 3,583,916 for 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. AND DEVELOPMENT COSTS The cost of research and development, all of which as been charged to operations, amounted to $4,420,000, $4,216,000, $5,218,000, $1,200,000 and $1,233,000 in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. They are summarized as follows:
December 31, March 31, 1993 1994 1995 (in thousands) Finished products $18,261 $20,024 $18,176 Work-in-process 15,555 19,439 23,447 Raw materials and purchased components 10,474 11,235 12,456 $44,290 $50,698 $54,079
2. LONG-TERM DEBT AND CONTINGENCIES Long-term debt consists of:
December 31, March 31, 1993 1994 1995 (in thousands) Note payable, due in annual installments of $714,000 commencing August 29, 1992 through 1998, with interest payable quarterly at 9.38% $ 3,571 $ 2,857 $ 2,857 Note payable, due December 11, 1995, with interest payable semi- annually at 9.52% 5,000 5,000 5,000 Note payable, due under revolving loan agreement, with interest at 7.12% as of March 31, 1995 10,500 8,021 14,102 19,071 15,878 21,959 Less current portion 714 714 714 $18,357 $15,164 $21,245
In 1994, the Company entered into an unsecured credit arrangement with three banks which provides for borrowing in several currencies up to the equivalent of $30,000,000 on a revolving loan basis through August 1, 1997. The credit agreement provides for repayment of the outstanding principal beginning September 30, 1997 in 16 consecutive quarterly installments in amounts equal to 6.25% of the outstanding balance. Interest charged on the debt is based on the Company's choice of one, two, three, or six-month London Interbank Offered Rates (LIBOR) plus a fixed percent. A commitment fee of 3/8 of 1% is payable on the unused portion of the facility. The revolving credit note and the note payable in 1995 have been classified as long-term debt, as it is the Company's intention to maintain the principal amounts outstanding either through the existing credit facility or new borrowing arrangements. The Company also has a $5,000,000 unsecured short-term line of credit with a bank with interest based on a fixed percent over the one-month LIBOR. As of December 31, 1994, the $3,500,000 borrowed on this line carries HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 2. LONG-TERM DEBT AND CONTINGENCIES (CONTINUED) an interest rate of 6.38%. As of March 31, 1995, the $3,500,000 borrowed on this line carried an interest rate of 6.125%. The agreement is negotiated yearly and does not require any commitment fee. The debt agreements require, among other things, that the Company maintain specified levels of tangible net worth, working capital and indebtedness. Interest paid in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995 totaled $1,417,000, $1,340,000, $1,477,000, $235,000 and $298,000, respectively. The Company conducts some of its sales and service operations from leased office space with lease terms up to 15 years and uses certain data processing equipment under lease agreements expiring at various dates during the next four years. Rent expense under these leases totaled $1,391,000, $1,390,000, $1,290,000, $320,000 and $220,000 during the years ended December 31, 1992, 1993, 1994, and for the three months ended March 31, 1994 and 1995, respectively. Future minimum payments under noncancellable operating leases as of March 31, 1995 total $3,280,000, with payments over the next five years of $1,107,000, $929,000, $571,000, $232,000 and $58,000. The Company has provided financing terms of up to seven years for qualified customers who buy equipment. The Company may choose, when appropriate, to sell underlying notes receivable contracts to financial institutions to reduce debt and finance current operations. During 1992, 1993, 1994 and the three months ended March 31, 1994 and 1995, the Company sold notes totaling $6,900,000, $19,800,000, $30,000,000, $9,100,000 and $3,000,000, respectively. Recourse against the Company from default of any of the notes included in the sales is limited to 10% of the then outstanding balance of the underlying notes. At March 31, 1995, the Company was contingently liable to the extent of approximately $4,368,000 as a result of said financing transactions. 3. INCOME TAXES Effective January 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". The cumulative effect of adopting Statement 109 as of January 1, 1992 was to increase net income by $113,000 which is included under the caption "Cumulative effect of changes in accounting methods". Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1993 and 1994 and March 31, 1995, the Company has state investment tax credits expiring at various dates through the year 2004, foreign net operating loss carryforwards which can be carried forward indefinitely, and foreign tax credit carryforwards expiring in 1999 for which no benefit has been recognized in the financial statements. Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, March 31, 1993 1994 1995 (in thousands) Deferred tax assets: Federal and state tax credit carryforwards $ 928 $1,910 $2,277 Foreign net operating loss carryforwards 194 425 352 Postretirement benefits 1,784 1,792 1,795 Inventory valuation 595 872 836 Deferred employee benefits 442 754 952 Accrued pension 316 425 401 Other 148 499 431 4,407 6,677 7,044 Less valuation allowance 1,122 2,335 2,629 Total deferred tax assets 3,285 4,342 4,415
HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 3. INCOME TAXES (CONTINUED)
DECEMBER 31, MARCH 31, 1993 1994 1995 (IN THOUSANDS) Deferred tax liabilities: Tax over book depreciation 1,280 1,361 1,501 Margin on installment sales 129 230 230 Other 250 331 330 Total deferred tax liabilities 1,659 1,922 2,061 Net deferred tax assets $1,626 $2,420 $2,354
Pretax income (loss) before the "Cumulative effect of changes in accounting methods" was $4,992,000, $9,233,000, $11,709,000, $2,742,000 and $4,881,000 from domestic operations and $(2,270,000), $(349,000), $224,000, $(2,000) and $588,000 from foreign operations for 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. Significant components of income tax expense (benefit) attributable to continuing operations are as follows:
Three Months Ended Year Ended December 31, March 31, 1992 1993 1994 1994 1995 (in thousands) Current: Federal $1,666 $3,208 $4,812 $1,036 $1,680 Foreign (481) (87) 414 95 187 State 441 650 782 180 232 Total current 1,626 3,771 6,008 1,311 2,099 Deferred: Federal (129) (204) (739) (170) 58 Foreign (345) 163 53 12 -- State -- -- (108) (25) 8 Total deferred (474) (41) (794) (183) 66 $1,152 $3,730 $5,214 $1,128 $2,165
Income tax payments totaled $1,423,000, $3,629,000, $4,642,000, $188,000 and $1,650,000 in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the consolidated statements of income.
Three Months Ended Year Ended December 31, March 31, 1992 1993 1994 1994 1995 Federal income taxes 34.0% 34.0% 34.0% 34.0% 34.0% Tax differential on operations of foreign subsidiaries (2.0) 2.2 3.3 3.3 (.2) State income taxes 10.7 5.0 3.7 3.7 2.9 Other (.4) .8 2.7 .2 2.9 42.3% 42.0% 43.7% 41.2% 39.6%
As a result of changes in U.S. tax law effective in 1994, earnings of a foreign subsidiary were deemed distributed, and U.S. federal taxes of $260,000 were provided. The remaining undistributed earnings of the foreign HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 3. INCOME TAXES (CONTINUED) subsidiaries, which amounted to approximately $6,423,000 and $6,955,000 at December 31, 1994 and at March 31, 1995, are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. 4. SHAREHOLDERS' EQUITY Additional paid-in capital increased by $86,000, $36,000, $7,000, and $1,141,000 in 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively, as a result of shares distributed from Treasury pursuant to a long-term incentive plan (see Note 6). During the three month period ended March 31, 1995, common stock was reduced and additional paid-in capital was increased by $9,643,000 to reflect the stock transactions discussed in Note 8 to the financial statements. The following information has also been adjusted to give effect to the stock transactions discussed in Note 8. Transactions affecting treasury shares are summarized as follows:
Three Months Ended Year Ended December 31, March 31, 1992 1993 1994 1994 1995 (in thousands) Balance--beginning $ 1,105 $ 1,649 $ 565 $ 565 $361 Purchases 162 488 467 -- 476 Employee benefit plans: Contributions -- (1,504) (550) (375) -- Forfeitures 402 -- -- -- -- Sales (68) (121) (30) (97) Balance--ending $ 1,649 $ 565 $ 361 $ 160 $740
The number of shares in treasury were 147,954, 48,746, 33,232, 14,982 and 59,039 at December 31, 1992, 1993, 1994, and at March 31, 1994 and 1995, respectively. Dividends declared (per share) were $.74, $.79, $.84, $.15 and $.15 in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 5. INDUSTRY SEGMENT AND FOREIGN OPERATIONS The Company operates in one business segment--industrial machine tools. Domestic and foreign operations consist of:
Three Months Ended Year Ended December 31, March 31, 1992 1993 1994 1994 1995 (in thousands) Sales: Gross sales: United States $78,309 $ 94,268 $110,942 $ 25,900 $ 38,625 Western Europe 9,360 8,715 12,346 2,802 4,370 Other 4,903 8,403 12,980 1,613 3,228 Total 92,572 111,386 136,268 30,315 46,223 Less interarea transfers: United States 7,769 12,930 18,915 2,835 5,535 Western Europe 6 19 17 1 1 Total 7,775 12,949 18,932 2,836 5,536 Net sales: United States 70,540 81,338 92,027 23,065 33,090 Western Europe 9,354 8,696 12,329 2,801 4,369 Other 4,903 8,403 12,980 1,613 3,228 Total net sales $84,797 $ 98,437 $117,336 $ 27,479 $ 40,687 Operating income (loss): United States $ 5,175 $ 9,192 $ 12,220 $ 2,948 $ 5,262 Western Europe (1,281) (617) (875) (72) 314 Other (952) 889 1,614 101 248 Total operating income $ 2,942 $ 9,464 $ 12,959 $ 2,977 $ 5,824 Net income (loss) before cumulative effect of changes in accounting methods: United States $ 2,925 $ 5,148 $ 6,884 $ 1,654 $ 2,931 Western Europe (824) (596) (1,039) (86) 277 Other (531) 602 874 44 96 Total net income before cumulative effect of changes in accounting methods $ 1,570 $ 5,154 $ 6,719 $ 1,612 $ 3,304 Identifiable assets: United States $85,323 $ 97,816 $106,606 $ 96,612 $117,421 Western Europe 7,725 7,348 7,256 7,143 7,212 Other 5,413 6,005 7,864 5,701 7,858 Total identifiable assets $98,461 $111,169 $121,726 $109,456 $132,491
Interarea sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales. Operating income excludes interest income and interest expense including that which is directly attributable to the related operations. The operating loss in Western Europe in 1994 includes a $540,000 charge for the write- off of inventory that became obsolete when the Company changed its distribution strategies there. Operating income (loss) for 1992 includes charges for restructuring costs of $142,000, $327,000 and $617,000 in the United States, Western Europe and Other, respectively. The 1992 net income for the United States does not include the cumulative effect of changes in accounting methods of ($2,754,000). HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 6. EMPLOYEE BENEFITS PENSION PLAN The Company provides a non-contributory defined benefit pension plan covering all eligible domestic employees. The related benefits are generally based on years of service and a percentage of the employee's average annual compensation. The Company's practice is to fund all pension costs accrued and to contribute annually amounts within the range allowed by the Internal Revenue Service. A summary of the components of net periodic pension cost is presented below.
Three Months Ended Year Ended December 31, March 31, 1992 1993 1994 1994 1995 (in thousands) Service costs--benefits earned during the year $ 1,030 $ 1,054 $ 1,126 $ 282 $ 241 Interest costs on projected benefit obligation 2,720 2,844 3,055 764 796 Actual return on plan assets (4,668) (3,439) (1,538) (385) (951) Net amortization and deferral 1,305 (103) (2,065) (516) (46) Net pension costs $ 387 $ 356 $ 578 $ 145 $ 40
Actuarial assumptions used to determine pension costs include a discount rate of 8.75% at December 31, 1994 and for the three months ended March 31, 1994 and 1995 (7.75% and 8.50% as of December 31, 1993 and 1992, respectively), expected long-term rate of return on assets of 9% for all periods shown, and expected rate of increase in compensation levels of 5% for all periods shown. The increase in the discount rate in 1994 decreased the projected benefit obligation at the end of the year by $4,600,000. A summary of the Plan's funded status and amounts recognized in the Company's consolidated balance sheets is as follows:
1993 1994 (in thousands) Plan assets at fair value $43,705 $42,888 Projected benefit obligation for services rendered to date 40,403 37,570 Plan assets in excess of projected benefit obligation 3,302 5,318 Unrecognized net (gain) (5,154) (7,901) Unrecognized net (asset) from transition (2,613) (2,439) Unrecognized prior service costs resulting from Plan amendment 3,649 3,628 Net pension (liability) recognized in the balance sheets $ (816) $(1,394)
The actuarial valuation is performed at the Plan's year end. The pension liability at March 31, 1995 was $1,615,000. The portion of the projected benefit obligation representing the accumulated benefit obligation for the pension plan was $37,641,000 and $35,102,000 at the end of 1993 and 1994, respectively. The vested benefit obligation included in those numbers was $32,717,000 and $30,595,000 at the end of 1993 and 1994, respectively. Pension plan assets include shares of the Company's common stock valued at approximately $2,074,000 and $2,364,000 at December 31, 1993 and 1994, respectively. The remaining plan assets consisted of United States Government securities, corporate bonds and notes, other common stocks and an insurance contract. POSTRETIREMENT PLANS OTHER THAN PENSIONS The Company provides a contributory retiree health plan covering all eligible domestic employees who retired at normal retirement age prior to January 1, 1993 and all retirees who will retire at normal retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement are eligible for the plan benefits if they have 15 years of active service at retirement. Benefit obligations and funding policies are at HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) the discretion of the Company's management. Retiree contributions are adjusted annually and contain other cost- sharing features such as deductibles and coinsurance, all of which vary according to the retiree's date of retirement. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to limit its contributions to 125% of the average aggregate 1993 claim cost. The Company also provides a non-contributory life insurance plan to retirees. Because the amount of liability relative to this plan is insignificant, it is combined with the health plan for purposes of this disclosure. In 1992, the Company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company elected to immediately recognize the initial liability calculated at the time of adoption (the transition obligation) in its operations which resulted in a $2,867,000 after tax charge ($4,550,000 pretax) recorded as a "Cumulative effect of a change in accounting method" on the Consolidated Statements of Income and Retained Earnings. Aside from that adjustment, the effect of adopting the new rules increased 1992 net periodic postretirement benefit cost by $101,000 and decreased net income by $60,000. A summary of the components of net periodic other postretirement benefit costs relating to the plans is presented below.
Year Ended Three Months December 31, Ended March 31, 1992 1993 1994 1994 1995 (in thousands) Service costs--benefits earned during the year $ 94 $103 $ 97 $ 24 $ 20 Interest costs on projected benefit obligation 383 392 435 109 113 Amortization of actuarial losses -- -- 27 7 -- Amount recorded in operations $477 $495 $559 $140 $133
Actuarial assumptions used to determine the liability for postretirement plans other than pensions included a discount rate of 8.75%, 7.75%, 8.75%, 8.75% and 8.75% at December 31, 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. The annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend) was assumed to be 13% for 1994, 12% for 1995 and is assumed to decrease gradually to 6% by the year 2004 and remain at that level thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to the 125% cap on the Company's portion of the medical plan claims. A one percentage point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation by only $171,000 and increase the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1994 by $20,000. The Company has not prefunded any of its postretirement health and life insurance liabilities and, consequently, there are no expected returns on assets anticipated in the calculation of expense. A schedule reconciling the accumulated benefit obligation with the Company's recorded liability follows:
1993 1994 (in thousands) Accumulated postretirement benefit obligation: Current retirees $(3,144) $ (2,988) Fully eligible active participants (843) (1,345) Other active participants (1,816) (1,024) Total (5,803) (5,357) Unrecognized losses 1,046 520 Accrued postretirement benefit recognized in balance sheet $(4,757) $(4,837)
HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 6. EMPLOYEE BENEFITS (CONTINUED) The actuarial valuation is performed at the Plan's year end. The accrued postretirement benefit at March 31, 1995 was $4,864,000. GROUP HEALTH PLAN The Company has a contributory group benefit plan which provides medical and dental benefits to all of its domestic employees. EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains an Employee Stock Ownership Plan. The Plan covers substantially all employees of the Company subject to minimum employment period requirements. The approved Plan required establishment of an employee stock ownership trust, which borrowed from a bank to purchase the Company's common stock. The Company thereby effectively obligated itself to contribute to the employee trust sufficient amounts to allow the trust to repay the loan and related interest installments through 1996. The balance of the loan, including the current portion of $200,000, was $550,000, $350,000 and $300,000 at December 31, 1993, 1994 and March 31, 1995, respectively. Contributions (including dividends) to the trust for the years ended December 31, 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, totaled $274,000, $257,000, $240,000, $61,000 and $57,000, respectively. The interest portion of those contributions was $74,000, $57,000, $40,000, $11,000 and $7,000 in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. Approximately $67,000, $53,000, $41,000, $18,000 and $16,000 of dividends on shares owned by the ESOP were used to service debt requirements in 1992, 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. 401(K) PLAN The Company also maintains a 401(k) Savings Plan. Provisions of the Plan allow employees to defer from 1% to 15% of their pre-tax salary to the Plan. Those contributions may be invested at the option of the employees in either fixed income securities or Hardinge Brothers, Inc. common stock. LONG-TERM INCENTIVE PLANS The following information has been adjusted to give effect to the stock transactions discussed in Note 8. In 1993, the Board of Directors established an Incentive Stock Plan to assist in attracting and retaining key employees. The Plan allows the Board to grant restricted stock and performance share awards up to an aggregate of 405,000 shares of common stock to these employees. The ability of the Board to grant awards under a similar incentive stock plan from 1988 expired on December 31, 1991. During 1993, certain officers and other key managers were awarded a total of 134,750 restricted shares of common stock. During 1994 and the three months ended March 31, 1995, 46,750 and 95,500 restricted shares of common stock were awarded. Restrictions on 24,600 and 18,450 shares of common stock from the 1988 Plan expired in 1993 and 1994, respectively. Restrictions on 10,250 shares of common stock from the 1993 Plan expired during the three months ended March 31, 1995. As of March 31, 1995, a total of 491,800 restricted shares of common stock were outstanding under the two Plans. All shares of restricted stock are subject to forfeiture and restrictions on transfer, and unconditional vesting occurs upon the completion of a specified period ranging from four to eight years from the date of grant. Deferred compensation associated with these grants is measured by the market value of the stock on the date of grant and totaled $1,584,000, $575,000, $375,000 and $1,377,500 in 1993, 1994 and for the three months ended March 31, 1994 and 1995, respectively. This deferred compensation is being amortized on a straight-line basis over the specified service period. The unamortized deferred compensation at December 31, 1993, 1994 and March 31, 1994 and 1995 totaled $2,826,000, $2,591,000, $3,024,000 and $3,737,000 respectively, and is included along with Employee Stock Ownership Benefits as a reduction of shareholders' equity. FOREIGN OPERATIONS The Company also has employees in certain foreign countries that are covered by defined benefit pension plans and other employee benefit plans. Related obligations and costs charged to operations are not material. HARDINGE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO MARCH 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED) 7. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for 1993, 1994 and the three months ended March 31, 1995 is as follows:
Quarter First Second Third Fourth (in thousands, except per share data) 1993 Net sales $24,588 $25,113 $22,511 $26,225 Gross profit 9,015 8,791 7,939 9,523 Income from operations 2,638 2,315 1,633 2,878 Net income 1,494 1,259 928 1,473 Net income per share .43 .35 .26 .41 1994 Net sales $27,479 $29,023 $29,449 $31,385 Gross profit 9,549 10,010 10,394 10,446 Income from operations 2,977 3,358 2,975 3,207 Net income 1,612 1,819 1,608 1,680 Net income per share .45 .51 .45 .47 1995 Net sales $40,687 Gross profit 13,913 Income from operations 5,498 Net income 3,304 Net income per share .92
8. SUBSEQUENT EVENTS In connection with a proposed public offering, the Board of Directors has approved amendments to the Company's Certificate of Incorporation ("Certificate"). The amendments include (a) authorization of a new class of Preferred Stock consisting of 2,000,000 shares; (b) converting each Class A common share into 2.00 shares of a new single class of Common Stock, representing a 2-for-1 stock split and each Class B common share into 2.05 shares of a new single class of Common Stock, representing a 2.05-for-1 stock split; and (c) increasing the number of shares of Common Stock the Company is authorized to issue from 6,000,000 to 20,000,000 shares and reducing the par value of all Common Stock from $5 to $0.01 per share. Such amendments must be approved by the Company's shareholders at its annual meeting on May 16, 1995, which approval (in the case of clauses (b) and (c)) will be conditioned upon the approval by the Board of Directors, or a committee thereof, just prior to the effective date of a registration statement, of the final terms of an underwriting agreement with respect to the proposed public offering. Promptly following approval of the underwriting agreement, an amendment to the Company's Certificate will be filed with the Secretary of State of the State of New York. The March 31, 1995 balance sheet and all share and per share data appearing in the financial statements and notes thereto have been restated giving effect to the amendments discussed above. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the Registrant's expenses in connection with the securities being registered. Except for the SEC registration fee, the Nasdaq National Market application fee and the NASD filing fee, the amounts listed below are estimates. All of the following expenses will be paid by the Registrant:
SEC registration fee $ 18,174 Nasdaq National Market application fee 32,775 NASD filing fee 5,773 Printing and engraving expenses * Legal fees and expenses * Accounting fees and expenses * Blue sky qualification fees and expenses * Miscellaneous * Total $ *
* To be completed by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant is incorporated under the New York Business Corporation Law ("NYBCL"). Section 722 of the NYBCL generally permits a corporation to indemnify its officers and directors against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney's fees actually and necessarily incurred in an action or proceeding (other than an action by or in the right of a corporation, a "derivative action"), if such directors or officers acted in good faith, for a purpose which they reasonably believed to be in the best interests of the corporation, and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was wrongful. A similar standard is applicable in the case of derivative actions except that no indemnification is permitted in respect of (i) a threatened action, or a pending action which is settled or disposed of, or (ii) any claim, issue or matter as to which such officers or directors are adjudged to be liable to the corporation, unless and only to the extent a court determines that such officers or directors are fairly and reasonably entitled to indemnity for such portion of the settlement and expenses as the court deems proper. Section 724 of the NYBCL requires indemnification in a civil action or proceeding if so ordered by a court. Article XI of the By-Laws of the Registrant provides indemnification of its directors and officers to the fullest extent permitted by the NYBCL. The Registrant's directors and officers also are covered by a conventional directors' and officers' insurance policy. ITEM 16. EXHIBITS.
ITEM DESCRIPTION * 1 - Form of Underwriting Agreement. 4.1 - Restated Certificate of Incorporation of Hardinge Brothers, Inc. 4.2 - Amendment to the Restated Certificate of Incorporation of Hardinge Brothers, Inc. * 4.3 - Amendment to the Restated Certificate of Incorporation. 4.4 - By-Laws of Hardinge Brothers, Inc. 4.5 - Section 719 through 726 of the New York Business Corporation Law are incorporated by reference from the Registrant's Form 10, effective June 29, 1987. * 4.6 - Form of certificate for shares of Common Stock of Hardinge Inc. * 5 - Opinion of Shearman & Sterling as to the validity of the Common Stock. 10.1 - The 1988 Hardinge Brothers, Inc. Incentive Stock Plan, as adopted by shareholders at the annual meeting of shareholders held on May 17, 1988, is incorporated by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1988 and the Annual Proxy Statement dated April 28, 1988. 10.2 - First Amendment to Hardinge Brothers, Inc. 1988 Incentive Stock Plan is incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. 10.3 - Hardinge Brothers, Inc. 1993 Incentive Stock Plan is incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. 10.4 - Hardinge Brothers, Inc. Executive Supplemental Pension Plan is incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. + 10.5 - Credit Agreement dated as of August 1, 1994 among Hardinge Brothers, Inc., the Banks signatory thereto and The Chase Manhattan Bank, relating to a $30,000,000 revolving loan. + 10.6 - Note Agreement dated August 29, 1991 between Hardinge Brothers, Inc. and AEtna Life Insurance Company, relating to the issuance by Hardinge Brothers, Inc. of $5,000,000 principal amount of its 9.38% notes due 1998. Note Agreement dated December 11, 1990 between Hardinge Brothers, Inc. and AEtna Life Insurance Company, relating to the issuance by + 10.7 - Hardinge Brothers, Inc. of $5,000,000 principal amount of its 9.52% notes due 1995. + 10.8 - Employment Agreement with Robert E. Agan dated as of April 1, 1995. + 10.9 - Employment Agreement with J. Allan Krul dated as of April 1, 1995. + 10.10 - Employment Agreement with Malcolm L. Gibson dated as of April 1, 1995. + 10.11 - Employment Agreement with Douglas A. Greenlee dated as of April 1, 1995. + 10.12 - Employment Agreement with Douglas C. Tifft dated as of April 1, 1995. + 10.13 - Form of Deferred Directors Fee Plan. + 10.14 - Description of Incentive Cash Bonus Program. Loan Purchase Agreement dated as of October 26, 1994, between Hardinge Brothers, Inc. and Chemung Canal Trust Company, relating to the purchase of $3,000,000 of receivables contracts by Chemung + 10.15 - Canal Trust Company from Hardinge Brothers, Inc. Loan Purchase Agreement dated as of March 24, 1995, between Hardinge Brothers, Inc. and Chemung Canal Trust Company, relating to the purchase of $3,000,000 of receivables contracts by Chemung + 10.16 - Canal Trust Company from Hardinge Brothers, Inc. 23.1 - Consent of Ernst & Young LLP, Independent Auditors. * 23.2 - Consent of Shearman & Sterling (included in its opinion filed as Exhibit 5). + 24 - Powers of Attorney (see page II-3).
+ Previously filed as an exhibit to Registration Statement (Reg. No. 33-91644) filed with the Securities and Exchange Commission on April 27, 1995. * To be filed by amendment. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liability (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b)(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certificates that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Elmira, State of New York, on the 11th day of May 1995. HARDINGE BROTHERS, INC. By /s/ Robert E. Agan Robert E. Agan President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated on May 11, 1995:
Signature Title /s/ Robert E. Agan (Robert E. Agan) President, Chief Executive Officer and Director /s/ Malcolm L. Gibson Senior Vice President/Chief Financial Officer and (Malcolm L. Gibson) Assistant Secretary * (Douglas A. Greenlee) Vice President and Director * (Richard L. Simons) Controller * (J. Philip Hunter) Secretary and Director * (John W. Bennett) Director * (Richard J. Cole) Director * (James L. Flynn) Director * (E. Martin Gibson) Director * (Boyd McDowell II) Director * (Dr. Eve L. Menger) Director * (Whitney S. Powers) Director
*By /s/ Malcolm L. Gibson (Malcolm L. Gibson) Attorney-in-fact EX-4.1 2 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION -of- HARDINGE BROTHERS, INC. Under Section 807 of the Business Corporation Law We, ROBERT E. AGAN and BELA C. TIFFT, being respectively, the President and the Secretary of Hardinge Brother, Inc., in accordance with Section 807 of the Business Corporation Law, hereby certify: 1. The name of the corporation is Hardinge Brothers, Inc. 2. The corporation is a consolidation of Morrison Machine Products, Inc. whose Certificate of Incorporation was filed in the Office of the Secretary of State of the State of New York on December 14, 1925, and Hardinge Brothers, Inc., whose Certificate of Incorporation was filed in the Office of the Secretary of State of the State of New York on March 3, 1931. The Certificate of Consolidation, pursuant to Section 86 of the New York Stock Corporation Law, was filed in the office of the Secretary of State of the State of New York on December 24, 1937. 3. The text of the Certificate of Incorporation as amended heretofore is hereby restated without further amendment or change to read as herein set forth: 1. The name of the corporation is Hardinge Brothers, Inc. 2. The purposes for which it is to be formed are to acquire, buy, purchase, lease or otherwise equip, maintain and operate a general machine shop, to design and manufacture tools, machinery, boilers, engines and all things made wholly or partly from metals, to do repairing, welding, brazing, stamping and cutting and electrical work of all kinds, to engage in all kinds of mechanical and electrical engineering and manufacturing business; to apply for, acquire, buy, lease, sell, assign, pledge or otherwise acquire or dispose of letters patent issued by the United States or by any foreign country; and to acquire by purchase or otherwise, and to sell, assign, or pledge or license territorial rights authorizing the manufacture of patent articles, to acquire by purchase or otherwise licenses, privileges, inventions, trade-marks and trade-names used in connection with any article that this corporation has the right to manufacture, buy or sell; and to grant licenses under letters patent of the United States or any foreign country; to purchase, lease or otherwise acquire and to sell, mortgage or lease real property, whether improved or unimproved, or any interest therein, and to any amount, in the State of New York, or any state or territory of the United States or any foreign country; and to conduct and carry on its business or any branch thereof in any state or territory of the United States or in any foreign country, in conformity with the laws of said state, territory or foreign country; and to have and maintain in any said state, territory or foreign country a business office, plant or store; and to do and perform all and everything which may be necessary, advisable or suitable and proper for the conduct of the business of said corporation and for the purpose of carrying out the objects heretofore expressed, and to exercise all implied powers and rights in the conduct of the business which the corporation may possess. 3. The amount of capital stock which the corporation is hereafter to have is Thirteen Million Five Hundred Thousand Dollars ($13,500,000) to consist of Two Million Seven Hundred Thousand (2,700,000) shares of common stock of the par value of Five Dollars ($5.00) each. The common shares shall be divided into two classes, one to be known as "Class A Common" and to consist of One Million Two Hundred Thousand (1,200,000) shares and the other to be known as "Class B Common" and to consist of One Million Five Hundred Thousand (1,500,000) shares. 4. The designations, privileges, voting powers or restrictions or qualifications of the shares of each class are as follows: (a) The entire voting powers for the election of Directors of the corporation shall be vested in the Class B Common stock. On all other matters except as otherwise provided by law or this Certificate of Incorporation, each holder of Class A Common stock and Class B Common stock shall have equal voting powers of one vote for each share then standing in his name on the books of the Corporation and shall vote together as a single class. (b) Both classes of Common stock shall share equally in all dividends and each share of Class A and Class B Common stock outstanding at the time of dissolution shall share equally in the distribution of the assets. (c) No holder of stock of the corporation, of whatever class, shall have any preferential or prescriptive right of subscription to any shares of the capital stock of the corporation, of any class issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors in its discretion may determine. 5. The office of the corporation shall be located in the City of Elmira, County of Chemung, New York, and the address to which the Secretary of State shall mail a copy of process in any action or proceeding against the corporation, which may be served upon him, is 1420 College Avenue, Elmira, New York. 6. The duration of the corporation shall be perpetual. 7. Subject to the other provisions of this Certificate of Incorporation, the Board of Directors shall manage and direct the business and affairs of the Corporation as provided in the Bylaws of the Corporation. The Bylaws may be amended only by the affirmative vote of at least 75% of the entire Board of Directors or by the affirmative vote of the holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. The directors elected at the 1986 annual meeting of stockholders shall be classified, with respect to the time for which they severally hold office, into two classes, as nearly equal in number as possible. The first class shall be originally elected for a term of one (1) year and the second class shall be originally elected for a term of two (2) years, with the directors of each class to hold office until their successors are elected and qualified. At each subsequent annual meeting of the stockholders of the corporation, the successors of the class of directors whose terms expire at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the second year following the year of their election. If the number of directors is changed, any increase or decrease shall be apportioned in the manner provided in the Bylaws among the classes so as to maintain or attain as nearly as possible an equal number of directors in each class. Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors or change in the restrictions and qualifications for directors shall shorten the term of any incumbent director. Any director, an entire class of directors or the entire Board of Directors may be removed from office, only for cause, and only by the affirmative vote of the holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, or adopt any provision inconsistent with or to repeal this Article 7, provided, however, that the vote of only a majority of the outstanding shares of stock of the Corporation entitled to vote generally in the election of Directors voting together as a single class shall be required if such alteration, amendment, inconsistent provision or repeal was approved by at least 75% of the entire Board of Directors. 8. The Secretary of State is designated as the agent of the corporation upon whom process in any action or proceeding against it may be served. 9. Business Combinations. 9.1 For the purposes of this Article 9: 1. The term "beneficial owner" and correlative terms shall have the meaning as set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any similar successor Rule. Without limitation and in addition to the foregoing, any shares of Voting Stock of this Corporation which any Major Stockholder has the right to vote or to acquire (i) pursuant to any agreement, (ii) by reason of tenders of shares by stockholders of the Corporation in connection with or pursuant to a tender offer made by such Major Stockholder (whether or not any tenders have been accepted, but excluding tenders which have been rejected), or (iii) upon the exercise of conversion rights, warrants, options or otherwise, shall be deemed "beneficially owned" by such Major Stockholder. 2. The term "Business combination" shall mean: a. any merger or consolidation (whether in a single transaction or a series of related transactions, including a series of separate transactions with a Major Stockholder, any Affiliate or Associate thereof or any Person acting in concert therewith) of this Corporation or any Subsidiary with or into a Major Stockholder or of a Major Stockholder into this Corporation or a Subsidiary; b. any sale, lease, exchange, transfer, distribution or other disposition, including without limitation, a mortgage, pledge or any other security device, to or with a Major Stockholder by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all, substantially all or any Substantial Part of the assets of this Corporation or a Subsidiary (including, without limitation, any securities of a Subsidiary); c. the purchase, exchange, lease or other acquisition by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all, substantially all or any Substantial Part of the assets or business of a Major Stockholder; d. the issuance of any securities, or of any rights, warrants or options to acquire any securities, of this Corporation or a Subsidiary to a Major Stockholder or the acquisition by this Corporation or a Subsidiary of any securities, or of any rights, warrants or options to acquire any securities, of a Major Stockholder; e. any reclassification of Voting Stock, recapitalization or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of Voting Stock of the Corporation or any Subsidiary thereof which is beneficially owned by a Major Stockholder. f. Any plan or proposal for any partial or complete liquidation, spin off, split off or split up of the Corporation or any Subsidiary thereof proposed directly or indirectly by or on behalf of a Major Stockholder, and g. any agreement, contract or other arrangement providing for any of the transactions described herein. 3. The term "Continuing Director" shall mean (i) a person who was a member of the Board of Directors of this Corporation immediately prior to the time that any then existing Major Stockholder became a Major Stockholder or (ii) a person elected to the Board of Directors at the 1986 Annual Meeting of stockholders or (iii) a person designated (before initially becoming a director) as a Continuing Director by a majority of the then Continuing Directors. All references to a vote of the Continuing Directors shall mean a vote of the total number of Continuing Directors of the Corporation. 4. The term "Major Stockholder" shall mean any Person which, together with its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or any similar successor Rule) and any Person acting in concert therewith, is the beneficial owner of 10% or more of the votes held by the holders of the outstanding shares of the Voting Stock of this Corporation, and any Affiliate or Associate of a Major Stockholder, including a Person acting in concert therewith. The term "Major Stockholder" shall not include a Subsidiary of this Corporation, nor a Person who was a Major Stockholder on May 20, 1986. 5. The term "Person" shall mean any individual, corporation, partnership or other person, group or entity (other than the Corporation, any Subsidiary of the Corporation or a trustee holding stock for the benefit of employees of the Corporation or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements). When two or more Persons act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnerships, syndicate, association or group will be deemed a "Person". 6. The term "Subsidiary" shall mean any business entity 50% or more of which is beneficially owned by the Corporation. 7. The term "Substantial Part", as used in reference to the assets of the Corporation, of any Subsidiary or of any Major Stockholder means assets having a value of more than 10% of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the determination is made. 8. The term "Voting Stock" shall mean Class A Common and Class B Common and any other securities entitled to vote upon any action to be taken in connection with any Business Combination including stock or other securities convertible into Voting Stock. 9.2 Notwithstanding any other provisions of these Articles of Incorporation and except as set forth in 9.3 of this Article 9, neither the Corporation nor any Subsidiary shall be party to a Business Combination unless the Business Combination was approved by at least 75% of the outstanding Voting Stock of this Corporation and by at least 75% of the outstanding Voting Stock beneficially owned by stockholders other than any Major Stockholder, provided, however, that such 75% vote of the outstanding stockholders and such 75% vote of the stockholders other than the Major Stockholder shall not be required and such Business Combination shall only require such affirmative vote, if any, of the stockholders as is required by law and any other provision of this Certificate of Incorporation, if 1. The Business Combination was approved by the Board of Directors of the Corporation prior to the Major Stockholder involved in the Business Combination becoming a Major Stockholder; or 2. The Major Stockholder involved in the Business Combination sought and obtained the unanimous prior approval of the Board of Directors to become a Major Stockholder and the Business Combination was approved by a majority of the Continuing Directors; or 3. The Business Combination was approved by at least 75% of the Continuing Directors of the Corporation; or 9.3 During the time a Major Stockholder exists, a resolution to voluntarily dissolve the Corporation shall be adopted only upon the vote by at least 75% of the outstanding Voting Stock of this Corporation and by at least 75% of the outstanding Voting Stock beneficially owned by stockholders other than any Major Stockholder, provided, however, that such 75% vote of the outstanding stockholders and such 75% vote of the stockholders other than the Major Stockholder shall not be required and such Business Combination shall require only such affirmative vote, if any, of the stockholders as is required by law and any other provision of this Certificate of Incorporation if such dissolution was approved by the vote of at least 75% of the Continuing Directors of the Corporation. 9.4 The Board of Directors of the Corporation, when evaluating a Business Combination or the dissolution of the Corporation, shall give due consideration to all relevant factors, including without limitation the social and economic effects of such action or transaction upon the Corporation, its stockholders, employees, customers, vendors, suppliers and other constituencies, and on the communities in which the Corporation operates or is located. 9.5 As to any particular transaction, the Continuing Directors shall have the power and duty to determine, on the basis of information known to them: 1. The amount of Voting Stock beneficially held by any Person; 2. Whether a Person is an Affiliate or Associate of another; 3. Whether a Person is acting in concert with another; 4. Whether the assets subject to any Business Combination constitute a "Substantial Part" as herein defined; 5. Whether a proposed transaction is subject to the provisions of this Article 9; and 6. Any other matters with respect to which a determination is required under this Article 9. Any such determination shall be conclusive and binding for all purposes of this Article 9. 9.6 The affirmative vote of the Board of Directors, the Continuing Directors, or the Voting Stock required by this Article 9 is in addition to the vote otherwise required by law or this Certificate of Incorporation. 9.7 Any amendment, change or repeal of this Article 9 or any other amendment of these Articles of Incorporation which would have the effect of modifying or permitting circumvention of the provisions of this Article 9 shall require approval by at least 75% of the outstanding Voting Stock of the Corporation and at least 75% of the outstanding Voting Stock beneficially owned by stockholders other than any Major Stockholder, provided, however, that such 75% vote of the outstanding stockholders and such 75% vote of the stockholders other than the Major Stockholder shall not be required and such Business Combination shall only require such affirmative vote, if any, of the stockholders as is required and such Business Combination shall only require such affirmative vote, if any, of the stockholders as is required by law and any other provision of this Certificate of Incorporation if such amendment, change, repeal or other amendment was approved by the vote of at least 75% of the Continuing Directors of the Corporation. 9.8 The requirements and restrictions of this Article 9 relating to Business Combinations are in addition to the requirements and restrictions of Section 912 of the Business Corporation Law relating to Business Combinations but shall not limit any requirements or restrictions of said Section 912 relating to Business Combinations. 10. The provisions of Section 912 of the Business Corporation Law shall apply to this Corporation. 4. This restatement of the Certificate of Incorporation was authorized by the Board of Directors. IN WITNESS WHEREOF we have duly subscribed this Restated Certificate this 28th day of April, 1987. s/Robert E. Agan --------------------------------------- Robert E. Agan, President of Hardinge Brothers, Inc. s/Bela C. Tifft --------------------------------------- Bela C. Tifft, Secretary of Hardinge Brothers, Inc. State of New York, ) : ss. County of Chemung. ) On this 28 day of April , 1987, before me, personally came Robert E. Agan and Bela C. Tifft, to me known, and known to me to be the persons described in and who executed the foregoing Restated Certificate of Incorporation, and they thereupon severally duly acknowledged to me that they executed the same. s/Douglas C. Tifft --------------------------------------- Notary Public State of New York, ) : ss. County of Chemung. ) Robert E. Agan and Bela C. Tifft, being duly sworn, depose and say that each for himself deposes and says: That he, Robert E. Agan, is the President of Hardinge Brothers, Inc. and he, Bela C. Tifft, is the Secretary thereof; that he was duly authorized to execute and file the foregoing restated Certificate of Incorporation by the authorization of the Board Of Directors of Hardinge Brothers, Inc., at a Directors' meeting held at No. 1420 College Avenue, in the City of Elmira, New York, on the 28th day of April, 1987, at 8:00 A.M. s/Robert E. Agan --------------------------------------- Robert E. Agan, President s/Bela C. Tifft --------------------------------------- Bela C. Tifft, Secretary Subscribed and sworn to before me this 28th day of April, 1987. s/Douglas C. Tifft - ---------------------------------- Notary Public EX-4.2 3 AMEND. TO THE RESTATED CERTIFICATE OF INC. Certificate of Amendment of CERTIFICATE OF INCORPORATION -of- HARDINGE BROTHERS, INC. Under Section 805 of the Business Corporation Law. We, the undersigned, Robert E. Agan, President, and Bela C. Tifft, Secretary, of Hardinge Brothers, Inc., do hereby certify as follows: 1. The name of the corporation is Hardinge Brothers, Inc. 2. The corporation is a consolidation of Morrison Machine Products, Inc., whose Certificate of Incorporation was filed in the Office of the Secretary of State of the State of New York on December 14, 1925, and Hardinge Brothers, Inc., whose Certificate of Incorporation was filed in the Office of the Secretary of State of the State of New York on March 3, 1931. The Certificate of Consolidation, pursuant to Section 86 of the New York Stock Corporation Law, was filed in the office of the Secretary of State of the State of New York on December 24, 1937. On May 19, 1987, pursuant to Section 807 of the Business Corporation Law, a Restated Certificate of Incorporation was filed in the Office of the Secretary of State of the State of New York. 3. The corporation's Certificate of Incorporation is hereby amended to increase the aggregate number of shares of Class A Common stock of the par value of $5.00 per share which the corporation is authorized to issue from 1,200,000 shares of Class A Common stock of the par value of $5.00 each to 3,000,000 shares of Class A Common stock of the par value of $5.00 each and to increase the aggregate number of shares of Class B Common stock of the par value of $5.00 per share which the corporation is authorized to issue from 1,500,000 shares of Class B Common stock of the par value of $5.00 each to 3,000,000 shares of Class BA Common stock of the par value of $5.00 each and for this purpose, Article 3 of the Certificate of Incorporation is hereby amended to read as follows: 3. The amount of capital stock which the corporation is hereafter to have is Thirty Million Dollars ($30,000,000) to consist of Six Million (6,000,000) shares of common stock of the par value of Five Dollars ($5.00) each. The common shares shall be divided into two classes, one to be known as "Class A Common" and to consist of Three Million (3,000,000) shares and the other to be known as "Class B Common" and to consist of Three Million (3,000,000) shares. 4. The corporation's Certificate of Incorporation is hereby further amended to add an Article 11 thereto reading as follows: 11. Liability of Directors. A director of the Corporation shall not be liable to the Corporation or its stockholders for damages for any breach of duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Business Corporation Law as the same exists or may hereafter be amended. Any repeal or modification of this Article 11 by the stockholders of the Corporation shall not affect adversely any right or protection of a director of the Corporation existing at the time of such repeal or modification. 5. These amendments of the Certificate of Incorporation were authorized by vote of the Board of Directors, followed by vote of the holders of a majority of all outstanding shares of Class A Common stock and Class B Common stock entitled to vote thereon at a meeting of stockholders held on May 17, 1988. IN WITNESS WHEREOF, we have signed this Certificate this 27th day of May, 1988. s/Robert E. Agan --------------------------------------- Robert E. Agan, President. s/Bela C. Tifft --------------------------------------- Bela C. Tifft, Secretary. State of New York, ) : ss. County of Chemung. ) Robert E. Agan, being duly sworn, deposes and says that he is the President of Hardinge Brothers, Inc., the corporation described in the foregoing Certificate; that he has read the foregoing Certificate and knows the contents thereof and that the same is true to the knowledge of deponent. s/Robert E. Agan --------------------------------------- Robert E. Agan, President. Sworn to before me this 27th day of May, 1988. s/J. Park Poerio - ---------------------------------- Notary Public. State of New York, ) : ss. County of Chemung. ) Bela C. Tifft, being duly sworn, deposes and says that he is the Secretary of Hardinge Brothers, Inc., the corporation described in the foregoing Certificate; that he has read the foregoing Certificate and knows the contents thereof and that the same is true to the knowledge of deponent. s/Bela C. Tifft --------------------------------------- Bela C. Tifft, Secretary. Sworn to before me this 27th day of May, 1988. s/J. Mark Poerio - ---------------------------------- Notary Public. EX-4.4 4 BY-LAWS, AS AMENDED As in Effect 3/29/95 Last Amended 2/28/95 BY-LAWS -of- HARDINGE BROTHERS, INC. ARTICLE I Offices. SECTION 1. Principal Office. The principal office of the corporation shall be located in the County of Chemung and State of New York. SECTION 2. Other Offices. The corporation may also have such other offices, either within or without the State of New York, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Shareholders. SECTION 1. Place of Meetings of Shareholders. Meetings of shareholders may be held at such place, within or without the State of New York, as may be fixed by the Board of Directors. SECTION 2. Annual Meeting of Shareholders. A meeting of shareholders shall be held annually on such date and at such place and time as may be fixed by the Board of Directors for the election of directors and the transaction of other business. SECTION 3. Special Meetings of Shareholders. Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board or by the President. Such call shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be confined to the purpose or purposes for which the meeting is called. SECTION 4. Fixing Record Date. The Board of Directors may fix, in advance, a date as the record date for purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action. Such date shall be not more than fifty (50) nor less than ten (10) days before the date of such meeting nor more than 50 days before any other action. If no record date is fixed, the record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given and for all other purposes shall be at the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. SECTION 5. Notice of Meetings of Shareholders. Written notice of every meeting of shareholders shall state the place, date and hour of the meeting and unless it is the annual meeting indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the statutory requirements to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. A copy of the notice of any meeting shall be given, personally or by mail, not less than ten (10) nor more than fifty (50) days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the secretary of the corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. SECTION 6. Adjourned Meetings. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting the corporation may transact any business that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice. SECTION 7. List of Shareholders at Meeting. A list of shareholders as of the record date, certified by the secretary or by the transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meetings, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. SECTION 8. Quorum of Shareholders. The holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders. Despite the absence of a quorum, the shareholders present may adjourn the meeting. SECTION 9. Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. Every proxy must be signed by the shareholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is provided by law. SECTION 10. Inspectors at Shareholders' Meetings. The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint inspectors. If appointed on the request of one or more shareholders, the holders of a majority of shares present and entitled to vote thereat shall determine the number of inspectors to be appointed. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. A report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. SECTION 11. Qualifications of Voters. Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders. Neither treasury shares nor shares held by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, conservator, committee, or other fiduciary, except a trustee, may be voted by him, either in person or by proxy, without transfer of such shares into his name. Shares held by a trustee may be voted by him, either in person or by proxy, only after the shares have been transferred into his name as trustee or into the name of his nominee. Shares held by or under the control of a receiver may be voted by him without the transfer thereof into his name if authority so to do is contained in an order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the By-Laws of such corporation may provide, or, in the absence of such provision, as the Board of Directors of such corporation may determine. SECTION 12. Vote of Shareholders. Directors shall, except as otherwise required by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Any other corporate action by vote of the shareholders shall, except as otherwise required by law, these By-Laws or the certificate of incorporation, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. SECTION 13. Conduct of Shareholders' Meetings. The Officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as the presiding Officer may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. SECTION 14. Shareholder Proposals. No shareholder shall be entitled to submit a proposal to a meeting of shareholders unless at the time of submitting the proposal, the shareholder shall be a record or beneficial owner of at least 1% or $1,000 in market value of shares entitled to be voted at the meeting, and shall have held such shares for at least one year and shall continue to own such shares through the date on which the meeting is held. A shareholder meeting the above requirements shall deliver to the secretary of the corporation not later than 120 days prior to the date on which the corporation's proxy statement was mailed to stockholders in connection with the previous year's annual meeting, the text of any proposal which he intends to propose at an annual meeting of shareholders and a notice of the intention of the shareholder to present such proposal at the meeting. A proposal to be presented at any meeting of shareholders other than an annual meeting shall be delivered to the Secretary a reasonable time before the mailing of the corporation's proxy material. ARTICLE III Directors. SECTION 1. Board of Directors. The business of the corporation shall be managed under the direction of its Board of Directors. SECTION 2. Qualifications of Directors. Each director shall be at least 18 years of age. SECTION 3. Number of Directors. The number of directors constituting the entire Board shall be ten (10), provided however, effective upon the election of directors at the 1995 annual meeting of shareholders, said number shall be nine (9). This number may be increased or decreased from time to time by amendment of these By-Laws, provided, however, that the number may not be decreased to less than three (3). No decrease in the number of directors shall shorten the term of any incumbent director. SECTION 4. Election and Term of Directors. Effective at the 1986 annual meeting of shareholders, the directors shall be classified by the Board of Directors, with respect to the time for which they severally hold office, into two classes, as nearly equal in number as possible. The first class shall be originally elected for a term of one (1) year and the second class shall be originally elected for a term of two (2) years, with the directors of each class to hold office until their successors are elected and qualified. Newly created directorships resulting from an increase in the number of directors shall be classified by the Board of Directors when the directorship is created. At each annual meeting of the stockholders of the Corporation, the successors of the class of directors whose terms expire at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the second year following the year of their election or until their successors are elected and have qualified. SECTION 5. Nominations for Directors. Nominations of candidates for election as directors of the corporation at any meeting of stockholders called for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote at such meeting. Nominations made by the Board of Directors shall be made at a meeting of the Board of Directors, or by written consent of directors in lieu of a meeting, not later than sixty days prior to the date of any meeting of stockholders called for the election of directors. The Secretary of the corporation shall request that each such proposed nominee provide the corporation with such information concerning himself as is required, under the rules of the Securities and Exchange Commission, to be included in the corporation's proxy statement soliciting proxies for his election as a director. Any stockholder who intends to make a nomination at any annual meeting of stockholders shall deliver to the Secretary of the corporation not later than 120 days prior to the date on which the corporation's proxy statement was mailed to stockholders in connection with the previous year's annual meeting, or if such nomination is to be made at a meeting of shareholders other than an annual meeting, a reasonable time before the mailing of the corporation's proxy material, a notice setting forth (i) the name, age, business address and residence of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the corporation which are owned of record and beneficially by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominees. Such notice shall include a signed consent of such nominee to serve as a director of the corporation, if elected. In the event that a person is validly designated as a nominee in accordance with the provisions of this section and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. If the Secretary of the meeting of stockholders called for the election of directors determines that a nomination was not made in accordance with the foregoing procedures, such nomination shall be void. SECTION 6. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason may be filled by vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill, a newly created directorship or a vacancy shall be elected to hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until his successor has been elected and qualified. SECTION 7. Removal of Directors. Any director, an entire class of directors or the entire board of directors may be removed from office, only for cause, and only by the affirmative vote of the holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. SECTION 8. Quorum of Directors. One-third (1/3) of the entire Board of Directors shall constitute a quorum for the transaction of business or of any specified item of business. SECTION 9. Action by the Board of Directors. The vote of the majority of the directors present at a meeting of the Board of Directors at the time of the vote, if a quorum is present at such time, shall, except as otherwise provided by law, these By-Laws or the certificate of incorporation, be the act of the Board of Directors. SECTION 10. Written Consent of Directors Without a Meeting. Any action required or permitted to be taken by the Board of Directors or a committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. SECTION 11. Place and Time of Meetings of Board of Directors. Meetings of the Board of Directors, regular or special, may be held at any place, within or without the State of New York and at any time, fixed by the Board of Directors or by the person or persons calling the meeting. Such meetings may be held by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. SECTION 12. Notice of Meetings of the Board of Directors. Regular meetings of the Board of Directors may be held without notice if the time and place of such meetings are fixed by the Board of Directors. Special meetings of the Board of Directors shall be held upon notice to the directors and may be called by the Chairman of the Board or the President, or any two directors. The notice shall be given personally including by telephone or mail, telegram, cable or other public instrumentality. If given personally or by telephone, such notice shall be given not less than 48 hours before the meeting to each director. If given by mail, cable telegram or other public instrumentality, such notice shall be given not less than five (5) days before the date of the meeting, to each director. Such notice shall be deemed given, if mailed, when deposited in the United States mail, with postage thereon prepaid, or, if telegraphed, cabled or sent by other public instrumentality, when given to the telegraph company, cable company, or other public instrumentality, directed to the director at his business address, or, if he shall have filed with the secretary of the corporation a written request that notices to him be mailed or telegraphed, cabled or sent to some other address, then directed to him at such other address. The notice need not specify the purpose of any regular or special meeting of the Board of Directors. SECTION 13. Interested Directors. No contract or other transaction between the corporation and one or more of its directors, or between the corporation and any other corporation, firm, association or other entity in which one or more of its directors or officers are directors, or have a substantial financial interest, shall be either void or voidable for this reason alone or by reason alone that such director or directors are present at the meeting of the Board, or of a committee thereof, which approves such contract or transaction, or that his or their votes are counted for such purpose: (1) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the Board or committee, and the Board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the Board as defined in Section 9 of this Article, by unanimous vote of the disinterested directors; or (2) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders; or (3) If the contract or transaction is affirmatively established by the party or parties thereto to be fair and reasonable as to the corporation at the time it was approved by the Board, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or a committee thereof which approves such contract or transaction. The Board of Directors shall have authority to fix the compensation of Directors for services in any capacity. A loan shall not be made by the corporation to any director unless it is authorized by vote of the shareholders. For this purpose, the shares of the director who would be the borrower shall not be shares entitled to vote. SECTION 14. Reimbursement and Compensation of Directors. The directors may be paid their expenses of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of the executive committee or other committees may be allowed similar reimbursement and compensation for their services as such. SECTION 15. Executive Committee and Other Committees. The Board of Directors by resolution adopted by a majority of the entire board, may designate from among its members an executive committee and other committees, each consisting of three or more directors. Except as to matters listed below and except as otherwise provided by the Board of Directors, the executive committee, during the interim between meetings of the board of directors, shall possess and may exercise all of the powers of the Board of Directors in the management and direction of the business and conduct of the affairs of the corporation, and shall have power to authorize the seal of the corporation to be affixed to all papers which may be required. Each other committee shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing it. No such committee shall have authority as to the following matters: (1) The submission to shareholders of any action that needs shareholders' approval; (2) The filling of vacancies in the Board of Directors or in any committee; (3) The fixing of compensation of the directors for serving on the Board of Directors or on any committee; (4) The amendment or repeal of the by-laws or the adoption of new by-laws; (5) The amendment or repeal of any resolution of the Board of Directors. Each such committee shall serve at the pleasure of the board. The Board of Directors shall have the power at any time to fill vacancies in, to change the size or membership of, and to discharge any such committee. A majority of any such committee may determine its action and may fix the time and place of its meetings, unless provided otherwise by the Board of Directors. Each such committee shall keep a written record of its acts and proceedings and shall submit such record to the Board of Directors at each regular meeting thereof and at such other times as requested by the Board of Directors. Failure to submit such record, or failure of the Board to approve any action indicated therein will not, however, invalidate such action to the extent it has been carried out by the Corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. ARTICLE IV Officers. SECTION 1. Officers. The Board of Directors may elect from its members a Chairman of the Board and shall elect a President, a Chairman of the Executive Committee, one or more Senior Vice Presidents and Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also at any time elect one or more Assistant Secretaries and/or Assistant Treasurers. Any two or more offices may be combined and conferred upon one person except the offices of President and Secretary. The Board of Directors shall appoint either the Chairman of the Board, if any, or the President, the Chief Executive Officer of the Corporation ("the CEO"), who, subject to the control of the Board of Directors, shall direct and control all the business and affairs of the Corporation. The Board of Directors may appoint a Senior Vice President as the Chief Operating Officer of the Corporation ("the COO") who shall be subject to the control of, and perform such duties as may be assigned by, the Chairman of the Board, the President or the Board of Directors. The Board of Directors may appoint a Senior Vice President as the Chief Financial Officer of the Corporation ("the CFO") who shall be responsible for all the fiscal affairs of the Corporation and who shall be subject to the control of, and perform such duties as may be assigned by, the Chairman of the Board, the President or the Board of Directors. SECTION 2. Election and Term of Office. The officers of the Corporation shall be elected by a majority vote of the entire Board of Directors at its first meeting held after the annual meeting of the stockholders. In the event of the failure of the Board to elect such officers at such meeting or in the event of a vacancy then such election may be made at any subsequent regular or special meeting of the Board. The President, the Chairman of the Board and the Chairman of the Executive Committee shall be, but the other officers need not be, directors of the Corporation. All officers shall serve under the direction of and at the pleasure of the Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. SECTION 3. Powers and Duties of Officers. (a) Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, and shall perform such other duties as may be assigned to him from time to time by the Board. (b) Chairman of the Executive Committee. The Chairman of the Executive Committee shall preside at all meetings of the Executive Committee, and in the absence of the Chairman of the Board of Directors and the President shall preside at all meetings of stockholders and at all meetings of the Board of Directors. He shall have such other and further powers and shall perform such other and further duties as may be assigned to him by the Board of Directors. (c) President. The President shall perform the duties of the Chairman of the Board of Directors in his absence or during his inability to act. Any action taken by the President in the performance of the duties of the Chairman of the Board of Directors shall be conclusive evidence of the absence or inability to act of the Chairman of the Board of Directors at the time such action was taken. He shall also have such other and further powers and shall perform such other and further duties as may be assigned to him by the Board of Directors. (d) Senior Vice Presidents and Vice Presidents. Senior Vice Presidents and Vice Presidents shall perform such duties as may be assigned to them by the Chairman of the Board of Directors or by the President or by the Board of Directors. The Board of Directors may designate any one or more of said Senior Vice Presidents as the Chief Operating Officer or the Chief Financial Officer. (e) Treasurer. The Treasurer shall have the care and custody of the corporate funds and securities. He shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation in the manner ordered by the Board. He shall upon request render an account of all his transactions as Treasurer to the Board of Directors. He shall, at all reasonable hours, exhibit his books and accounts to any director upon application. He or an Assistant Treasurer or such other officers, directors or agents as may be designated by the Board of Directors shall endorse checks, notes or drafts payable to the order of the corporation and sign and countersign checks, drafts, and orders for the payment or withdrawal of moneys or securities on deposit in the corporate accounts in such manner as the Board may direct. He shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chairman of the Board of Directors or by the President. (f) Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors, and the stockholders, unless another person be appointed for that purpose by the stockholders, and also, unless another person be appointed for that purpose by the Executive Committee, the minutes of the Executive Committee, in books provided for that purpose. He shall give or cause to be given all notices required by these by-laws or by resolution of the Board of Directors. He shall have charge of the stock certificate books, stock transfer books and stock ledgers, all of which shall at all reasonable hours be open to the examination of any director; he shall have custody of the seal of the Corporation; and he shall in general perform all the duties usually incident to the office of Secretary, subject to the control of the Board of Directors. The Secretary or an Assistant Secretary shall also certify all resolutions and proceedings of the stockholders, directors and Executive Committee. (g) Controller. The Controller shall be the chief accounting officer of the corporation, and shall be responsible for and have active control of all matters pertaining to the accounts of the corporation. He shall audit all payrolls and vouchers and shall direct the manner of certifying the same; shall supervise the manner of keeping all vouchers for payments and all other documents relating to such payments; shall receive and audit all operating and financial statements of the corporation and its subsidiaries; shall have the care, custody and supervision of the books of account of the corporation, their arrangement and classification and shall supervise the accounting and auditing practices of the corporation. He shall, at all reasonable hours, exhibit his books and accounts to any director upon application. He shall, upon request, render an account of the financial condition of the corporation to the Board of Directors. He shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chairman of the Board of Directors or the President. (h) Assistant Officers. The Assistant Secretary or Secretaries and the Assistant Treasurer or Treasurers shall perform the duties of the Secretary and of the Treasurer, respectively, in the absence of those officers and shall have such further powers and perform such other duties as may be assigned to them respectively by the Board of Directors. (i) Removal. Any officer (other than a director) may be removed, either with or without cause, by a vote of a majority of the whole Board of Directors at a special meeting of the Board called for that purpose, or by any committee or superior officer upon whom such power of removal may be conferred by the Board of Directors. (j) Bond. Any officer of the Corporation shall give a bond for the faithful discharge of his duties, in such sum, when and as shall be required by the Board of Directors. (k) Compensation. The compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the corporation. SECTION 4. The Chairman of the Board, President, Secretary, or any other officer designated by the Board of Directors, is hereby empowered to endorse or execute and deliver any instrument of transfer of any certificate for shares of stock, or bond, or other security owned by or standing in the name of the Corporation. ARTICLE V Contracts, Checks and Deposits. SECTION 1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 2. Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select. ARTICLE VI Certificates Representing Shares, Record of Shareholders, Transfer of Shares. SECTION 1. Issuance of Shares. No shares of any class of the corporation or any obligations or other securities convertible into or carrying options to purchase any such shares of the corporation, or any options or rights to purchase any such shares or securities of the corporation, shall be issued or sold unless such issuance or sale is approved by the affirmative vote of at least a majority of the entire Board of Directors. SECTION 2. Certificates Representing Shares. The shares of the corporation shall be represented by certificates which shall be in such form as shall be determined by the Board of Directors. All such certificates shall be consecutively numbered or otherwise identified. Such certificates shall be signed by the Chairman of the Board or the President or a Vice-President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may, but need not, be sealed with the seal of the corporation or a facsimile thereof. The signature of the officers upon the certificate may be facsimiles if the certificate is countersigned by a transfer agent or an assistant transfer agent, or registered by a registrar other than the corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. Each certificate shall state upon the face thereof; (1) that the corporation is formed under the laws of New York; (2) the name of the person or persons to whom issued; (3) the number and class of shares and the par value of each share represented by such certificate. SECTION 3. Lost, Destroyed or Wrongfully Taken Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, apparently destroyed or wrongfully taken upon the making of an affidavit of that fact by the person claiming the certificate to be lost, apparently destroyed or wrongfully taken. When authorizing such issue of a new certificate or certificates, the Board of Directors, may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, apparently destroyed or wrongfully taken certificate or certificates, or his legal representative to advertise the same in such manner as it shall require and/or give the corporation a bond in such sum and with such surety or sureties as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, apparently destroyed or wrongfully taken. SECTION 4. Record of Shareholders. The corporation shall keep at its principal office, or at the office of its transfer agent in the State of New York, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. The corporation shall be protected in treating the persons in whose names shares stand on the record of shareholders as the owners thereof for all purposes. SECTION 5. Transfer of Shares. Upon surrender to the corporation or the transfer agent of the corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of shares shall be entered on the record of shareholders of the corporation. ARTICLE VII Fiscal Year. The fiscal year of the corporation shall be the calendar year. ARTICLE VIII Dividends. The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its certificate of incorporation. ARTICLE IX Seal. The seal of the corporation shall be circular in form and contain the name of the corporation, the year when it was formed, and the words "New York". The corporation may use the seal causing it or a facsimile to be affixed or impressed or reproduced in any other manner. ARTICLE X Waiver of Notice. SECTION 1. Waiver of Notice to Shareholders. Notice of meeting need not be given to any shareholder who signed a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. SECTION 2. Waiver of Notice to Director. Notice of meeting need not be given to any director who signs a waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. SECTION 3. Notice Dispensed with When Delivery Prohibited. Whenever communication to any shareholder or any director is unlawful under any statute of the State of New York or of the United States or any regulation, proclamation or order issued under said statutes, the giving of any notice to such shareholder or such director shall not be required and there shall be no duty to apply for license or other permission to so do. ARTICLE XI Indemnification. To the fullest extent permitted by law, either directly or by the purchase of insurance or in part directly and in part by the purchase of insurance, the corporation shall indemnify each natural person, or if deceased, his personal representative made or threatened to be made a party to any action or proceeding civil or criminal, including an appeal therein against the reasonable expenses, attorneys' fees, judgments, fines and amounts paid in settlement if such person is made or threatened to be made a party by reason of the fact that he or his testator or intestate is or was: (1) an officer, director or employee of the corporation or (2) an officer, director or employee of or served in any capacity in any other corporation, partnership, joint venture, trust or other enterprise, at the request of this corporation, provided that in the case of a person serving as an employee or in any other capacity in any other corporation, partnership, joint venture, trust or other enterprises, that such person was at the time he was so designated to serve by this corporation, an employee of this corporation, or (3) the occupant of a position or a member of a committee or board or a person having responsibilities under federal or state law, including but not limited to responsibilities under the Employee Retirement Income Security Act of 1974, who was appointed to such position or to such committee or board by the Board of this corporation or by an officer of this corporation or who served in such position or on such committee or board at the request or direction of the Board of this corporation or of an officer of this corporation or who assumed such responsibilities at the request or direction of the Board of this corporation or of any officer of this corporation, provided only that such person acted in good faith for a purpose which he reasonably believed would be in the best interest of the corporation or in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to the best interests of the corporation, and in criminal proceedings had no reasonable cause to believe that his conduct was unlawful. The corporation's obligations under this Article shall be reduced by the amount of any insurance which is available to any such person whether such insurance is purchased by the corporation or otherwise. The right of indemnity created herein shall be personal to the officer, director, employee or other person and their respective legal representatives and in no case shall any insurance carrier be entitled to be subrogated to any rights created herein. Nothing contained herein shall obligate the corporation to indemnify any person against any claim arising out of personal injuries, bodily injuries or property damage. ARTICLE XII Employee Benefits. The Board may from time to time make such provision for the establishment, funding, and carrying out of pension, profit sharing, share bonus, share purchase, share option, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions for any and all of its employees and officers, as in its discretion the Board may deem advisable and the Board may from time to time adopt and carry out any such plan or plans of providing such benefits or modify, discontinue or terminate any such plan as may then be in force. If any such benefit plan entitles members of the Board to participate as employees of the company, every member of the Board shall be entitled to vote upon any matter relating to the adoption, administration, carrying out, modification, discontinuance or termination of any such plan. The Board shall have power to appropriate funds including cash, stock, and other property of the company to defray, in whole or in part, the cost of providing any such benefits which may be based upon services rendered by employees prior to the date of establishment or modification of such plan and upon services to be rendered thereafter prior to the retirement or other payment date provided therein and may obligate the company to make payments toward defraying any such expenses over a period of years, subject always to the power of the Board in its discretion to modify, discontinue and terminate any such benefit plan to the extent then permitted in existing tax or other laws. The Board shall have full power in its discretion to provide for the administration of any such benefit plan and the investment and reinvestment of funds therein by an insurance company, trustees (who may be directors, officers or employees of the company), or other agency under such terms and conditions as the Board may deem advisable or to provide for the administration of such plan and the investment and reinvestment of the funds therein by the company. The Board shall have full power in its discretion to delegate to such committees, individuals (who may be directors, officers or employees of the company) or independent consultants such part of the carrying out of any such plan as in its discretion it may deem advisable. ARTICLE XIII Amendment and Repeal. SECTION 1. Amendment and Repeal by the Shareholders. These By-Laws may be amended or repealed by the affirmative vote of holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, provided that the notice of meeting states such purpose. SECTION 2. Amendment and Repeal by the Board of Directors. These By-Laws may also be amended or repealed by the affirmative vote of at least 75% of the entire Board of Directors. EX-23.1 5 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated January 25, 1995, except for Note 8, as to which the date is , in the Registration Statement (Form S-2 No. 33-91644) and the related Prospectus of Hardinge Brothers, Inc. for the registration of 2,291,500 shares of its common stock. ERNST & YOUNG LLP Syracuse, New York (date) The foregoing consent is in the form that will be signed upon completion of the capital account transactions described in Note 8 to the financial statements. ERNST & YOUNG LLP Syracuse, New York May 9, 1995 -----END PRIVACY-ENHANCED MESSAGE-----